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 4 percent per annum a 9 percent per annum, respectively. Both of these interest rates are expressed as effective annual yeilds (EAYs).
What is the forward price of your contract?
Suppose both the spot rates unexpectedly shift downward by 1 percent.
What is the price of a forward contract otherwise identical to yours?
The solution calculates the price of a forward contract to buy a 10-year, zero coupon bond that will be issued in one year.