The price of a bond at time T, measured in terms of its yield, is G(yr). Assume geometric Brownian motion for the forward bond yield y in a world that is forward risk neutral with respect to a bond maturing at time 7. Suppose that the growth rate of the forward bond yield is a and its volatility y.

(a) Use It's lemma to calculate the process for the forward bond price in terms of ,

ay, y, and G(y).

(b) The forward bond price should follow a martingale in the world considered. Use this fact to calculate an expression for .

(c) Show that the expression for a is, to a first approximation, consistent with equation (27.1).AppendixLO1