Determine the underlying flat annual effective yield

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Reference no: EM132991991

The government issued 10-year bonds on 1/1/2005. The bonds have a face value of $110 and mature at par on 1/1/2015. They pay half-yearly coupons at 7% p.a. On 1/10/2011 Ann and Bob entered into a forward contract under which Ann agreed to sell Bob one of the above bonds on 1/9/2012 at a price of $99. Assume all months are of equal length.

(a) Write down an equation to determine the underlying flat annual effective yield.

(b) Calculate the value of this forward contract for Bob on 1/1/2012, given that at that date the yield curve is flat at 5% p.a.

Reference no: EM132991991

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