Explore BrainMass

Explore BrainMass

    Question About Price Of a Forward Contract

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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

    © BrainMass Inc. brainmass.com June 3, 2020, 7:08 pm ad1c9bdddf
    https://brainmass.com/economics/contracts/question-about-price-of-a-forward-contract-87219

    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

    ADVERTISEMENT