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Suppose that on February 15, 1994 a firm wants to enter into a forward contract to purchase 5-year Treasuries, with coupon rate 8%, in two years (semi-annual coupons). Semi-annually compounded yield curve on 2/15/1994:
Date Yield 2/15/1995 2.56%
8/15/1995 3.18% 2/15/1996 3.40% 8/15/1996 3.62% 2/15/1997 3.82% 8/15/1997 3.92% 2/15/1998 4.06% 8/15/1998 4.13% 2/15/1999 4.27% 8/15/1999 4.45% 2/15/2000 4.60% 8/15/2000 4.71% 2/15/2001 4.92% 8/15/2001 4.98% 2/15/2002 5.02%
a) Compute the forward price.
b) What is the value of the contract at initiation?
Your suggested point must not be mentioned in the book. For example, do not say that use time value of money for calculating payback period because that is discounted payback period already discussed in the book.
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