Given the following zero-coupon bond prices,what is the forward rate agreement (FRA)rate for a contract maturing at time 2?

Question

Quizplus · Accepted Answer

To calculate the FRA rate for a contract maturing at time 2, we need to first determine the zero-coupon bond prices for times 1 and 2.

Using the information provided, we can calculate the zero-coupon bond prices: 
- P(1) = 0.95
- P(2) = 0.90

Next, we use these prices to calculate the forward rate (F) between times 1 and 2 using the formula:

F = (P(1) / P(2))^(1/1) - 1

F = (0.95 / 0.90)^(1/1) - 1

F = 0.0556

Finally, we use the F value to calculate the FRA rate using the formula:

FRA rate = F / (1 + F * t)

where t is the length of the FRA contract in years (in this case, t = 1).

FRA rate = 0.0556 / (1 + 0.0556 * 1)

FRA rate = 0.0217

Therefore, the best choice is B as it is the only option that matches our calculated FRA rate.

Given the Following Zero-Coupon Bond Prices,what Is the Forward Rate