9.5.5

The term structure is currently flat, with zero coupon bonds having nominal annual yield rates of 10% compounded semi-annually for all maturities. A long term bond has an 8% coupon rate (payable semi-annually) with the next coupon six months from now. The price of the bond today is 76.00 (per 100 face amount).

(a) Find the no arbitrage delivery price (per 100 face amount) for a forward contract on the bond with delivery to take place one year from today.

(b) An individual takes a long position in a forward contact on the bond today, with delivery to take place in one year, based on the delivery price in (a). Six months from the time the forward contract in (a) was made, the term structure is still flat with zero coupon bonds having nominal annual yield rates of 10% compounded semi annually for all maturities, and (after the first coupon has been paid) the bond price is 76.50. Find the value of the long position on the forward contract six months after the contract was made.

answers in the back of the book are

(a) 75.59

(b) .70

Show work please