Question 7 (14 marks) A firm issued two coupon bonds at the outset. One of them is a two-year annual coupon bond with a coupon rate of 4% payable in arrears, a redemption rate of 105% and provides a gross redemption yield of 5.5% per annum. Another bond is a three-year annual coupon bond that pays 6% coupon in arrears and to be redeemed at par with an issuance price of $102.50 per nominal amount of $100. The one-year forward rate of interest starting in 1 year's time is 7% per annum. For the following questions, you may round interest rates to 2 decimal places in % throughout the calculation process. (a) Calculate the one-year forward rate starting in 2 years' time. (5 marks) (b) If the constant risk-free force of interest is 1.5% lower than the 2-year continuous spot rate of the firm, calculate the forward price (per $100 nominal amount) at time 0 of a forward contract for the 3-year annual coupon bond to be transacted immediately after its second coupon. (4 marks) (C) Suppose that the term structure of the discrete spot rates for the risky bond one year later has a parallel incremental shift of 1%, calculate the value of a long position in the forward contract in part (b) at that time. Assume that the constant risk-free force of interest remains the same. (5 marks) Question 7 (14 marks) A firm issued two coupon bonds at the outset. One of them is a two-year annual coupon bond with a coupon rate of 4% payable in arrears, a redemption rate of 105% and provides a gross redemption yield of 5.5% per annum. Another bond is a three-year annual coupon bond that pays 6% coupon in arrears and to be redeemed at par with an issuance price of $102.50 per nominal amount of $100. The one-year forward rate of interest starting in 1 year's time is 7% per annum. For the following questions, you may round interest rates to 2 decimal places in % throughout the calculation process. (a) Calculate the one-year forward rate starting in 2 years' time. (5 marks) (b) If the constant risk-free force of interest is 1.5% lower than the 2-year continuous spot rate of the firm, calculate the forward price (per $100 nominal amount) at time 0 of a forward contract for the 3-year annual coupon bond to be transacted immediately after its second coupon. (4 marks) (C) Suppose that the term structure of the discrete spot rates for the risky bond one year later has a parallel incremental shift of 1%, calculate the value of a long position in the forward contract in part (b) at that time. Assume that the constant risk-free force of interest remains the same