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