Question 2

210 days ago you purchased a newly issued bond with a maturity of 10 years. The bond carries a coupon rate of 8% paid semi-annually and has a face value of $1,000. The price of the bond with accrued interest is currently $1106.84. You plan to sell the bond 395 days from now. The schedule of coupon payments over the first two years, from the date of purchase, is as follows:

(a) Calculate the no-arbitrage price at which you should enter a forward contract to sell the bond. Assume that the risk-free rate is 6%. [5] (b) The forward contract is now 300 days old. Interest rates have fallen sharply; the risk-free rate is now 4%. The price of the bond with accrued interest is now $1163.00. Determine the value of the forward contract now and indicate whether you have accrued a gain or loss on your position. [5] (a) Calculate the no-arbitrage price at which you should enter a forward contract to sell the bond. Assume that the risk-free rate is 6%. [5] (b) The forward contract is now 300 days old. Interest rates have fallen sharply; the risk-free rate is now 4%. The price of the bond with accrued interest is now $1163.00. Determine the value of the forward contract now and indicate whether you have accrued a gain or loss on your position. [5]