Bond transactions may have different types of settlement. One can agree to purchase a bond with immediate or cash settlement. This requires the buyer to wire transfer the funds to the seller on the same day that the trade occurs.

Alternatively, one can agree to purchase a bond with one day settlement. This requires the buyer to transfer the funds to the seller on the next day after the trade occurs.It is also common to purchase a bond with a corporate settlement. This requires the buyer to pay for the bond on the third day after the trade occurs. Of course, a bond transaction can occur with any settlement period that is agreed on by the buyer and the seller. While the above settlement periods are common, alternative settlement is possible.

Today is day 0. Today, one can buy a bond with cash or immediate settlement at

prices that are implicit in the following annualized interest rates (with continuous compounding): 0r1 = 25%, 0 r5 = 20%, 0 r10 = 15%, 0 r30 = 10%, and 0 r90 = 10%. (In this case the subscripts refers to the number of days, not years.)

Part a.

What is the current price of a zero coupon bond that matures in 30 days with a face value of $10,000? Calculate the price assuming immediate (or cash) settlement.

Part b. What is the current price of a zero coupon bond that matures in 30 days with a face value of $10,000? Calculate the price assuming settlement occurs in five calendar days.

HINT: Part a is meant to be trivial, but it does provide a comparison with part b. In doing part b, you should think about forward contracts.