Question
193 days ago you purchased a newly issued bond with a maturity of 10 years. The bond carries a coupon rate of 8% paid semiannually
193 days ago you purchased a newly issued bond with a maturity of 10 years. The bond carries a coupon rate of 8% paid semiannually and has a face value of $1,000. The price of the bond with accrued interest is currently $1106.84. You plan to sell the bond 365 days from now. The schedule of coupon payments over the first two years, from the date of purchase, is as follows:
Coupon nr | Days after Purchase | Amount |
First | 181 | $40 |
Second | 365 | $40 |
Third | 547 | $40 |
Fourth | 730 | $40 |
(a) Calculate the no-arbitrage price at which you should enter a forward contract to sell the bond. Assume that the risk-free rate is 6%. [5]
(b) The forward contract is now 150 days old. Interest rates have fallen sharply; the risk-free rate is now 4 %. The price of the bond with accrued interest is now $1162.98. Determine the value of the forward contract now and indicate whether you have accrued a gain or loss on your position. [5]
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