You wish to create a synthetic forward rate agreement in which you would lock in a return between 150 and 310 days.The price of a 150-day zero coupon bond is 0.9823 and the price of 310-day zero coupon bond is 0.9634.What is the approximate yield on the synthetic FRA?
A) 1.8%
B) 2.0%
C) 2.9%
D) 3.8%

Question

Quizplus · Accepted Answer

The yield on the synthetic forward rate agreement (FRA) can be calculated using the prices of the zero-coupon bonds for the respective periods. The formula to approximate the yield is:$$ \text{Yield} = \left( \frac{\text{Price of shorter-term bond}}{\text{Price of longer-term bond}} - 1 \right) \times \frac{360}{\text{Days between the two periods}} $$Given:- Price of 150-day bond = 0.9823- Price of 310-day bond = 0.9634- Days between the two periods = 310 - 150 = 160 days$$ \text{Yield} = \left( \frac{0.9823}{0.9634} - 1 \right) \times \frac{360}{160} \approx 2.0\% $$Therefore, the approximate yield on the synthetic FRA is 2.0%.

You Wish to Create a Synthetic Forward Rate Agreement in Which