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Description of Forward contract

You enter into a forward contract to buy a 10-year, zero coupon bond that will be iussued in one year. The face value of the bond is $1000, and the 1-year and 11-year spot interest rates are 3 percent per annum and 8 percent per annum, respectively. Both of these interest rates are expressed as effective annual yiels (EAY's).

a) What is the forward price of your contract?

b) Suppose both the 1-year and 11-year spot rates unexpectedly shift downward by 2 percent. What is the price of a forward contract otherwise identical to yours?

Please show the mathematical calculations

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M928671

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