The government has just issued two bonds.The first bond pays $1,000 at the end of year 1 and is now selling for $909.29.The second bond pays $100 at the end of year 1 and $1,100 at the end of year 2 and is now selling for $976.15.
a. What are the spot and forward rates for 1-year and 2-year bonds?
b. Using the spot rates determined in part a, what is the duration of each of these bonds?
c. If a new bond is offered that pays $60 at the end of year 1 and $60 at the end of year 2, what must it sell for now?

Question

Quizplus · Accepted Answer

The Answer of The government has just issued two bonds.The first bond pays $1,000 at the end of year 1 and is now selling for $909.29.The second bond pays $100 at the end of year 1 and $1,100 at the end of year 2 and is now selling for $976.15.
a. What are the spot and forward rates for 1-year and 2-year bonds?
b. Using the spot rates determined in part a, what is the duration of each of these bonds?
c. If a new bond is offered that pays $60 at the end of year 1 and $60 at the end of year 2, what must it sell for now?

The Government Has Just Issued Two Bonds