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    Forward contract on a bond

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    A certain 10-year bond is currently selling for $920. A friend of yours owns a forward contract of this bond that has a delivery date in 1 year and a delivery price of $940. The bond pays coupons of $80 every 6 months, with one due months form now and another just before maturity of the forward. The current interest rates for 6 months and 1 year(compounded semiannually) are 7% and 8% respectively(annual rates compounded every 6 months). What is the current value of the forward contract?

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    Solution Preview

    Calculate the Forward price (F0) on the bond:

    Find the present value of Interest payments

    1st payment of $80.00 is after 1/2 year
    Discount rate = 7%
    Present value of this interest payment= $77.29 =80 / ( ...

    Solution Summary

    The solution calculates the current value of a bond forward contract.