Answered

At Westonci.ca, we provide clear, reliable answers to all your questions. Join our vibrant community and get the solutions you need. Join our platform to connect with experts ready to provide accurate answers to your questions in various fields. Our platform provides a seamless experience for finding reliable answers from a network of experienced professionals.

You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1000 and the one-year and 11-year spot interest rates are 5 and 7 percent respectively. What is the forward price of your contract

Sagot :

Tundexi

Answer:

$498.94

Explanation:

1 year interest rate = 5%

11 year interest rate = 7%

10 year spot interest rate at end of 1 year = [{(1+0.07)^11 / (1+0.05)}^(0.1) - 1]

10 year spot interest rate at end of 1 year = [(2.104852/1.05)^0.1] - 1

10 year spot interest rate at end of 1 year = 1.07202083615 - 1

10 year spot interest rate at end of 1 year = 0.072021

10 year spot interest rate at end of 1 year = 7.202%

Face value = $1,000

Forward Price of contract = $1000/(1+0.0720)^10

Forward Price of contract = $1000/2.00423136

Forward Price of contract = 498.944392915

Forward Price of contract = $498.94

Thanks for stopping by. We are committed to providing the best answers for all your questions. See you again soon. We appreciate your time. Please revisit us for more reliable answers to any questions you may have. We're glad you visited Westonci.ca. Return anytime for updated answers from our knowledgeable team.