8.1. The following are the current prices of zero-coupon bonds that have redempt

Question

8.1. The following are the current prices of zero-coupon bonds that have redemption value $1000:

Term to Maturity Price

1 $943.40

2 x

3 $805.08

(a) If the one year forward rate deferred 1 year is 8%, determine x.
(b) Using these interest rates, determine the price of a bond that pays annual coupons of 40 and matures to 500 in three years.

8.2. The following are prices for zero-coupon bonds with redemption value of $1,000:
Term to Maturity Price

1 $943.40

2 $898.47

3 $847.62

4 $792.16

Determine the one year forward rate starting in 2 years.

Explanation / Answer

Solution.

One year forward rate starting in 2 years = f2 = (1.1015)^2 / 1.0566) - 1 = 14.83%

year Price t0 Maturity Amount Diferrence Spot rate 1               943.40      1,000.00            56.60 5.66 2               898.47      1,000.00          101.53 10.153 3               847.62      1,000.00          152.38 15.238 4               792.16      1,000.00          207.84 20.784

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