4.

• Today is 09/12/07. The May 2037 spot TBond has a 5% annual coupon rate (and a dirty price of 107.52), where its Dec 07 TBond futures delivery revenue would be 104.07, the 3 month to maturity risk-free (annual continuously compounded) interest rate is 4%. Assuming the Dec 07 futures delivery date is 12/28/07, calculate the carry arbitrage expected delivery profit and IRR for this TBond spot/futures pair. Check your answer via a modified CTD spreadsheet and turn in the modified CTD spreadsheet. Based on the IRR, is the carry arb expected to be profitable?

• Part B) Assuming the 12 and 18 month spot yields are 0.0513 and 0.0544, respectively, calculate the 12 to 18 month implied forward rate. Assuming 6 months ago you agreed to lend $10M for 6 months beginning in 18 months at 5%, determine the FRAs current value.