Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is
$1,000.
Maturity (Years)
1
2
3
4
5
Price
$983.78
865.89
797.92
732.00
660.24
Required:
a. Calculate the forward rate of interest for each year.
b. How could you construct a 1-year forward loan beginning in year 3?
c. How could you construct a 1-year forward loan beginning in year 4?
Transcribed Image Text:Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $983.78 865.89 797.92 732.00 660.24 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?
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