(a) On January 1st the bond has a price of 94 and is expected to pay a coupon of 1.25 in 6 months and a further coupon of 1.25 in 12 months. The relevant risk-free interest rate is 5% per annum with continuous compounding. What should be the price of a forward contract, written on this bond, which matures immediately after the second coupon is paid and what is the initial value of the forward contract? (40 marks) (b) On July 1st the bond is trading at 99. What will be the new forward price and the current value of the long forward position which was opened in January? (40 marks) (c) Explain why the prices and valuations in parts (a) and (b) must hold. (20 marks)