) An investor purchased a newly issued corporate bond with a maturity of 10 years 200 days ago. The bond carries a coupon rate of 8% paid semiannually and has a face value of $1,000. The cash price is currently $1,146.92. The investor plans to sell the bond in one year from now. Assume that there are 30 days in a month and 360 days in one year.

(a) Should the investor enter into a long or short forward contract with the bond as an underlying to hedge his risk exposure? (b) Calculate the price at which the investor should enter the forward contract. Assume that the risk-free rate is 6% EAR. Coupons are reinvested at the YTM.

Assume that the forward price calculated above was $1,115. The forward contract is now at expiration. Interest rates have fallen sharply, and the cash price of the bond is now $1,302.26. Calculate the value of the forward contract now and determine whether the investor bears credit risk on his position.