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What forward rate does investor lock in at time

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1. Assume all rates are annualized with semi-annual compounding. Please be explicit about how you derive your results and round to four decimals after the comma.

(Part I) At time 0, Investor A enters into a forward contract, at no cost, to buy, at time 2, $100,000 par of a zero maturing at time 3. The forward price this investor locks in to pay at time 2 is $91,000.

a. What forward rate does this investor lock in at time 0, through this forward contract, for lending from time 2 to time 3?

(Part II) At time 1, the spot price of $1 par of a zero maturing at time 2 is 0.95 and the spot price of $1 par of a zero maturing at time 3 is 0.91.

a. At time 1, what is the forward price an investor could lock in to pay, at time 2, for $100,000 par of a zero maturing at time 3?

b. What is the value, at time 1, of Investor A's position in the forward contract from Part I?

2. Suppose you have a short position in a 30-year 5%-coupon bond and a long position in a zerocoupon bond with exactly the same market value and duration. If all zero rates fall by 25 basis points, will your net position rise or fall in value? Explain.

Reference no: EM13996965

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