Question 1:

Use the zero-coupon bond prices for a specified instrument with par equal to 1.00 recorded in the following table for various maturities to answer parts (a)-(c).

Maturity Zero Price

3-months 0.9950

6-months 0.9861

9-months 0.9748

12-months 0.9622

15-months 0.9489

18-months 0.9361

21-months 0.9243

24-months 0.9121

a. Using the prices in the table above, calculate:

i) The 6-month forward price for a 6-month zero-coupon bond.

ii) The 9-month forward price for a 3-month zero-coupon bond.

iii) The 12-month forward price for a 12-month zero-coupon bond.

b. By using the answers to part (a) or otherwise, calculate:

i) The 6-month forward interest rate for a 6-month loan.

ii) The 9-month forward interest rate for a 3-month loan.

iii) The 12-month forward interest rate for a 12-month loan.

c. A bank offers one of its clients a 1212 FRA (Forward Rate Agreement) with a contract size of 50.00 million. Calculate the gain to the bank on the maturity date of the forward contract if the prevailing relevant annualised interest rate is 4.50%.