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Unformatted text preview: 2 ) 2 = $50 / (1.10) + ($50 + $1,000) / (1.08) 2 = $45.45 + $900.21 = $945.66 The price of the bond is $945.66. 5A.3 Apply the forward rate formula to calculate the oneyear rate over the second year. (1+r 1 ) × (1+ f 2 ) = (1+r 2 ) 2 (1.09) × (1+ f 2 ) = (1.10) 2 f 2 = .1101 The oneyear forward rate over the second year is 11.01%. 5A.4 Calculate the forward rate over each year. a. Apply the forward rate formula to calculate the oneyear forward rate over the second year. (1+r 1 ) × (1+ f 2 ) = (1+r 2 ) 2 (1.05) × (1+ f 2 ) = (1.07) 2 f 2 = .0904 = 9.04% The oneyear forward rate over the second year is 9.04%. b. Apply the forward rate formula to calculate the oneyear forward rate over the third year. (1+r 2 ) 2 × (1+ f 3 ) = (1+r 3 ) 3 (1.07) × (1+ f 3 ) = (1.10) 3 f 3 = .1625 = 16.25% The oneyear forward rate over the third year is 16.25%....
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 Summer '06
 TimothyDreyer
 Finance, Net Present Value, $50, $45.45, $54.55, $860.32

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