Question

This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following questions.

Time		EAR
6 months		3.69	%
12 months		4.13
18 months		4.81
24 months		5.53

  

a.	What is the forward price of this contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.	Suppose shortly after you purchased the forward contract all rates increased by 25 basis points. For example, the six-month rate increased from 3.69 percent to 3.94 percent. What is the price of a forward contract otherwise identical to yours given these changes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

   

Answer 1

Bonds tace value 2 81000 Qa. we receind te bond's value in 18montas so we have to take 18mnts EAR TO calculate He current & forward price. current bond price 1000 1000 (It 4.8)/ (1+00482 : 1000 20 93196 1007301-$ forward price a current price (ltr) 1/2 Here interest rate is used was six month EAR because tonforward contract didgers for Gmonths. forward price: 931.96(1+0.0369)/2 Fotot-2.937.96(1,01828) 1201 - 948.9989 18948.99

b) If all rates increased by 25 ba Point, each rate is 0.0025 where 100 basis points = 1) I paint = 0.01% 25 points : 0.0025 New price of the bond is. 1000 (1+4.8).+0.00253/2" (1.osos) 3/2 21000, -8928.7638 1.0767 1000 38928.76

$90/+0.002875 The forward contract differs for 6 months so the forward price > 928-76(1+3:696%+0.004 2928.76(1.0369+0.0025)*72 =928.76 (101951) -$946.879 . forward price: $946.88.