Question 5 - (a) Consider a 2-year forward contract to sell a coupon-bearing bond that will mature 2 year from today. The current price of the bond is $107. Suppose that on that bond 4 coupon payments of $12 are expected after 6 months, 12 months, 18 months and 24-months. We assume that the 6-month, 12-month, 18-month and 24-month risk-free interest rates (continuously compounded) are, respectively, 0.8%, 1.2%, 1.85% and 2.3% per annum. Determine the delivery price of the forward contract if it was negotiated today.

(b) 15 months later, the price of the bond is $110 and the risk-free interest rates for maturities 3-month, 9-month, are, respectively, 0.4% and 0.65% per annum. What are the strike price, the forward price and the value of the forward contract?