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    Price of a Forward Contract

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    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 $1000, and the 1-year spot interest rates are 4 percent per annum at 9 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 spot rates unexpectedly shift downward by 1 percent. What is the price of a forward contract otherwise identical to yours?

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    Solution Preview

    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 $1000, and the 1-year spot interest rates are 4 percent per annum at 9 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 spot rates unexpectedly shift downward by 1 percent.  What is the price of a forward contract ...

    Solution Summary

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

    $2.19

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