You observe the following discount bond prices BT (relative to par value $100) at time 0:...

Transcribed Image Text:

You observe the following discount bond prices BT (relative to par value $100) at time 0: 3 $91.0 $97.0 i.e., you pay $97.0 now in exchange for $100 one year from now (T = 1), etc. (1) Compute the two-year forward rate (in percent per annum) for a loan that runs between years 1 and 3. (10 points) T (years from now) 1 Вт Time 0 Time 1 Time 2 Time 3 3 Suppose you want to lend $1m for one year starting two years from now, i.e.. from year 2 (T = 2) to year 3 (T= 3). Demonstrate the transactions needed to set up the forward loan and the resulting net cash flows, assuming you can borrow and lend at the bond prices above. Transactions: (20 points) 2 $94.1 Net cash flows: (20 points) Time 0 Time 1 Time 2 Time 3: You observe the following discount bond prices BT (relative to par value $100) at time 0: 3 $91.0 $97.0 i.e., you pay $97.0 now in exchange for $100 one year from now (T = 1), etc. (1) Compute the two-year forward rate (in percent per annum) for a loan that runs between years 1 and 3. (10 points) T (years from now) 1 Вт Time 0 Time 1 Time 2 Time 3 3 Suppose you want to lend $1m for one year starting two years from now, i.e.. from year 2 (T = 2) to year 3 (T= 3). Demonstrate the transactions needed to set up the forward loan and the resulting net cash flows, assuming you can borrow and lend at the bond prices above. Transactions: (20 points) 2 $94.1 Net cash flows: (20 points) Time 0 Time 1 Time 2 Time 3:

Answer rating: 100% (QA)

SOLUTION i To compute the twoyear forward rate we can use the formula Forward Rate BT2 BT11T 1 100 ... View the full answer