Question: ** Consider a forward contract on a 4-year bond with maturity 1 year. The current value of the bond is $1018.86, it has a

** Consider a forward contract on a 4-year bond with maturity 1 year. The current value of the bond is

** Consider a forward contract on a 4-year bond with maturity 1 year. The current value of the bond is $1018.86, it has a face value of $1000 and a coupon rate of 10% per annum. A coupon has just been paid on the bond and further coupons will be paid after 6 months and after 1 year, just prior to delivery. Interest rates for 1 year are flat at 8% with continuously compounding. Compute the forward price of the bond.

Step by Step Solution

★★★★★

3.38 Rating (151 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Solution To compute the forward price of the bond we need to consider the present value of all future cash flows associated with the bond Given Curren... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

What are the key components of Basel III regulatory framework, and how do they address the challenges associated with measuring and mitigating credit risk in banking activities, including the...

7.1. Using risk-neutral valuation, derive a formula for a derivative that pays cash flows over the next two periods. Assume the risk-free rate is 4 percent per period. The underlying asset, which...

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...

The complete question is: Consider a forward contract on a 4-year bond with maturity 1 year. The current value of the bond is $1018.86, it has a face value of $1000 and a coupon rate of 10% per...

A Forward contract on 4 years bond with maturity 1 year. Current value of the bond is 1018,86$, face value of 1000$ coupon rate is 10% per annum. Compute the forward price of the bond.

( ) $ 100 1 95.238 $ 100 2 $ 89 . 1 2 . f (1, 2) . (Arbitrage) On a market investors can buy and sell: Bond A maturity: 1 year, zero-coupon, face value: 100, price: 90. Bond B maturity: 2 years, face...

A zero - coupon bond with maturity 1 year and face value $ 1 0 0 currently sells for 9 4 . 3 4 $ . A zerocoupon bond with maturity 2 years and face value $ 5 0 0 currently sells for 4 6 2 . 2 5 $ . 1...

A zero - coupon bond with maturity 1 year and face value $ 1 , 0 0 0 currently sells for $ 9 5 2 . 3 8 . A zero - coupon bond with maturity 2 years and face value $ 5 0 0 currently sells for $ 4 2 8...

Problem 1. (10 pts) A trader wants to invest in gold. At the current moment the trader can buy gold for $1270 per ounce and sell gold for $1250 per ounce. Zero coupon bonds with maturity 1 year (and...

Problem 1. (8 pts) A trader wants to invest in gold. At the current moment the trader can buy gold for $1270 per ounce and sell gold for $1250 per ounce. Zero coupon bonds with maturity 1 year (and...

Suppose that a firm must choose between two mutually exclusive projects, both of which have negative NPVs. Explain how a firm can legitimately choose between two such projects.

1. Regulatory capture theory refers to the concept that, a.Market participants have less information than regulators so market participants in general get captured by their regulator(s) b.Regulators...

the word data is a singular word. true or false

Which odds ratio indicates that the baseline group and the non-baseline group are equally likely to experience the outcome of interest? (a) 0.45, (b)1.00, (c)1.33, or (d) 2.05.

Why can ordinary uranium not be used to fuel a reactor cooled by ordinary water?

LeDuc Construction Ltd. had 60,000 common shares and 20,000, $0.75 cumulative preferred shares outstanding on December 31, 2019. On April 30, 2020, the company issued 6,000 additional common shares...

The performance of the radix sort from the previous project can be improved by using more supplementary lists (rather than just list0 and list1). For example, you can have an array of 16 lists, which...

Civil engineers often use the straight-line equation E(y) = o + 1 x to model the relationship between the mean shear strength E(y) of masonry joints and pre compression stress x. To test this...

B) Jan transferred inventory ( $72,060 FMVI 30,000 All) and land (capital asset, $11,000 FMVI47,000 AB, acquired eight years ago) in exchange for additional common stock (FMV $55,000) and $35,000...

A five-year annuity of 10 $5,500 semiannual payments will begin nine years from now, with the first payment coming nine and a half years from now. If the discount rate is 8 percent compounded...

The Knight Corporation plans to be in business for one more year. It forecasts a cash flow of either $100 or $50 in the coming year, each occurring with 50 percent probability. The firm has no other...

Cheung Corp.s stock is currently selling at $43 per share. There are 1.3 million shares outstanding. The firm is planning to raise $2.9 million to finance a new project. What are the ex-rights stock...

People can cultivate happiness by being grateful, practicing generosity, cultivating a mindfulness practice to calm stress, and focusing on experiences rather than purchasing material goods.

There are cultural differences in which emotions are highly valued and in tendencies toward emotion regulation strategies, such as suppression.

Emotional expressions in one's face, voice, and touch trigger reactions in others, thus coordinating interactions such as flirtation or attachments between parents and children.