Explore BrainMass

Explore BrainMass

    Forward Price of a Contract on Zero-Coupon Bond

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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 $1,000, and the 1-year and 11-year spot interest rates are 3 percent per annum and 8 percent per annum, respectively. Both of these interest rates are expressed as effective annual yields (EAYs).

    a. What is the forward price of your contract?

    b. Suppose both the 1-year and 11-year spot rates unexpectedly shift downward by 2 percent. What is the price of a forward contract otherwise identical to yours?

    © BrainMass Inc. brainmass.com June 3, 2020, 6:17 pm ad1c9bdddf
    https://brainmass.com/business/bond-valuation/forward-price-of-a-contract-on-zero-coupon-bond-54753

    Solution Preview

    Bond will be issued in year 1, not now. So you need to calculate the bond price 1 year from now. For that you first need to calculate 10 year interest rate 1 year from now. This can be calculated using 1-year and 11-year spot interest rates.

    A. What is the forward price of the contract?

    We first need to calculate the 10 year interest rate at the end of year 1

    1 ...

    Solution Summary

    This solution provides calculations for the forward price of a contract on zero-coupon bond using step by step formula and explanation.

    $2.19

    ADVERTISEMENT