The prices of zero-coupon bonds with various maturities are given in the following table Suppose that you

The prices of zero-coupon bonds with various maturities are given in the following table

 

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Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000. Maturity (Years) 1 2 a. Suppose that you buy today one 3-year maturity zero-coupon bond. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero? (Round your answer to 4 decimal places.) 5-year maturity zeros Price $970.93 898.39 836.92 776.20 685.42 b. What are the cash flows on this strategy in each year? (Negative value should be indicated by a minus sign. Leave cell blank if there is no effect. Round your answers to 2 decimal places.) Time 0 3 5 Cash Flow c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? (Round your answer to 2 decimal places.) 2-year interest rate d. Confirm that the effective 2-year forward interest rate equals (1 + f₂)x(1+fg)-1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (Round your answer to 2 decimal places.) (175)³ (113) % 2-year loan rate Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000. Maturity (Years) 1 2 a. Suppose that you buy today one 3-year maturity zero-coupon bond. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero? (Round your answer to 4 decimal places.) 5-year maturity zeros Price $970.93 898.39 836.92 776.20 685.42 b. What are the cash flows on this strategy in each year? (Negative value should be indicated by a minus sign. Leave cell blank if there is no effect. Round your answers to 2 decimal places.) Time 0 3 5 Cash Flow c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? (Round your answer to 2 decimal places.) 2-year interest rate d. Confirm that the effective 2-year forward interest rate equals (1 + f₂)x(1+fg)-1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (Round your answer to 2 decimal places.) (175)³ (113) % 2-year loan rate

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1 Price of 3 year bondPr... View the full answer