Assume that the government has issued three bonds. The first, which pays $1,000 one year from today, is now selling for $909.09. The second, which pays $100 one year from today and $1,100 one year later, is now selling for $991.81. The third, which pays $ 100 one year from today, $ 100 one year later, and $1,100 one year after that, is now selling for $997.18.
a. What are the current discount factors for dollars paid one, two, and three years from today?
b. What are the forward rates?
c. Honus Wagner, a friend, offers to pay you $500 one year from today, $600 two years from today, and $700 three years from today in return for a loan today. Assuming that Honus will not default on the loan, how much should you be willing to loan?