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Calculate the forward rate from 1 to 3 years

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Reference no: EM133074301

Subject: Finance Topics

Consider a bond A, with equal coupons, face value of $20,000 and issue rate of 5%, with a 5-year term. The bond matures in 2 years and has just paid coupon. The bond trades at $8,217.28.Consider a B bond, it has 1 coupon of $3,000 left, which is paid in one year and matures in one year. Its trading price is $2,857.14.

And a bond C, with equal coupons, face value of $20,000, issue rate of 5%, term of 5 years, the bond matures in 3 years and just paid coupon and trades at $11,988.16.

a) Draw a graph of spot rate vs. term, indicating the value of the spot rate for years 1, 2 and 3.

b) Calculate the forward rate from 1 to 3 years.

c) How much is the rate expected to be worth in the long term?

Reference no: EM133074301

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