Continue to use the data in the preceding problem. Suppose that you want to construct a two-

Question:

Continue to use the data in the preceding problem. Suppose that you want to construct a two- year-maturity forward loan commencing in three years.

a. Suppose that you buy today one three- year- maturity zero- coupon bond. How many five- year-maturity zeros would you have to sell to make your initial cash flow equal to zero?

b. What are the cash flows on this strategy in each year?

c. What is the effective two- year interest rate on the effective three- year- ahead forward loan?

d. Confirm that the effective two- year interest rate equals (1 + f4) × (1 + f5) - 1. You therefore can interpret the two- year loan rate as a two- year forward rate for the last two years. Alternatively, show that the effective two- year forward rate equals

(1+y5)5 / (1+y3)3 – 1

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...