Answered

Westonci.ca is the best place to get answers to your questions, provided by a community of experienced and knowledgeable experts. Discover detailed solutions to your questions from a wide network of experts on our comprehensive Q&A platform. Explore comprehensive solutions to your questions from knowledgeable professionals across various fields on our platform.

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

Your visit means a lot to us. Don't hesitate to return for more reliable answers to any questions you may have. Thank you for your visit. We're dedicated to helping you find the information you need, whenever you need it. Stay curious and keep coming back to Westonci.ca for answers to all your burning questions.