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Question About Price Of a Forward Contract

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% per annum and 9% per annum respectively. Both of these interest rates are expressed as effective annual yields (EAY's).

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?

**respond with answers in EXCEL and show formulas

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 $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 (EAY's).

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 ...

Solution Summary

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

$2.19