Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The

Question:

Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000.

Maturity (Years) Price

1 ............. $925.93

2 ............. 853.39

3 ............. 7 82.92

4 ............. 715.00

5 ............. 650.00

a. Calculate the forward rate of interest for each year.

b. How could you construct a 1-year forward loan beginning in year 3? Confirm that the rate on that loan equals the forward rate.

c. Repeat (b) for a 1-year forward loan beginning in year 4.

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...