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    Price of a Forward Contract

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    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% per annum and 9% per annum, respectively. Both of these interest rates are expressed as effective annual yields (EAYs). one year. The face value of the bond is:
    a. What is the forward price of your contract?

    b. Suppose both the spot rates unexpectedly shift downward by 1%. What is the price of a forward contract otherwise identical to yours?

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    Solution Preview

    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 year spot interest rate= 4%
    11 year spot interest rate= 9%

    Therefore 10 year spot interest rate at the end of year 1= 9.51% ={(1+9.%)^11/(1+4.%)}^(1/10)-1
    (^ ...

    Solution Summary

    The solution calculates the price of a forward contract for different spot interest rates.

    $2.19

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