Question
The prices of zero-coupon bonds with various maturities are given in the following table. Suppose that you want to construct a 2- year maturity forward
The prices of zero-coupon bonds with various maturities are given in the following table.
Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000.
Maturity (Years) | Price | ||
1 | $ | 968.16 | |
2 | 878.39 | ||
3 | 812.92 | ||
4 | 749.00 | ||
5 | 675.46 | ||
a. Suppose that you buy today one 3-year maturity zero-coupon bond. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero? (Round your answer to 4 decimal places.)
b. What are the cash flows on this strategy in each year? (Negative value should be indicated by a minus sign. Leave cell blank if there is no effect. Round your answers to 2 decimal places.)
c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? (Round your answer to 2 decimal places.)
d. Confirm that the effective 2-year forward interest rate equals (1 + f4) (1 + f5) 1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (Round your answer to 2 decimal places.)
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