Question 1 (8 marks) Suppose you enter into a forward contract for a 15-year coupon paying corporate bond. The bond has a face value of $10,000 and pays six-monthly coupons of 8% per annum. The forward contract specifies that in 5.5 years, immediately after the coupon then due, you will sell the bond to the other party (Investor A) for a certain forward price, K₀.

(a) Assuming a risk-free effective rate of interest of 5% per annum (i.e., i = 5%), and an agreed forward price of $10,400, calculate the current price of the bond. [4 marks]

(b) Suppose it is now exactly 3.75 years since you entered into the forward contract and you have decided to sell the forward contract to another investor (Investor B, who will therefore also hold the short position in the contract). Assuming the same risk-free rate of interest as in (b) above, and that the current price (i.e., at 3.75 years after entering the forward contract) of the corporate bond is $10,900, and that no arbitrage opportunities exist, what price will Investor B be willing to pay for the existing forward contract?

(Step-by-step solution is preferred, please not solve by using an excel spreadsheet. Thanks in advance)