Consider a forward contract to buy a ten-year bond in one year; currently the eleven-year bond has a coupon rate of 10%,paid semi-annually with a price of $1,050.The current and effective risk-free rate of interest is 4%.What is the fair forward price?

Question

Quizplus · Accepted Answer

The fair forward price is calculated by discounting the bond's price and coupon payments to the present value using the risk-free rate, then compounding it forward to the delivery date. The bond's price is $1,050, and the coupon payment is $50 every six months. The present value of these cash flows is calculated and then compounded at the risk-free rate of 4% for one year to find the fair forward price.

Consider a Forward Contract to Buy a Ten-Year Bond in One