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You enter into a forward contract to buy a 13-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 14-year spot interest rates are 5.2 percent and 10 percent, respectively. Assume annual compounding.

(a) What is the forward price of your contract?

(b) Suppose both the 1-year and 14-year spot rates unexpectedly shift downward by 2 percent. What is the new price of the forward contract?

Basic Finance, Finance

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