The prices of zero-coupon bonds with various maturities are given in the following table

Finance Dec 21, 2020

The prices of zero-coupon bonds with various maturities are given in the following table. Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000. Maturity (Years) 1 2 3 Price $ 975.66 885.89 821.92 759.20 670.20 5 a. Suppose that you buy today one 3-year maturity zero-coupon bond. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero? (Round your answer to 4 decimal places.) 5-year maturity zeros b. What are the cash flows on this strategy in each year? (Negative value should be indicated by a minus sign. Leave cell blank if there is no effect. Round your answers to 2 decimal places.) Time Cash Flow 0 3 5
c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? (Round your answer to 2 decimal places.) 2-year interest rate % d. Confirm that the effective 2-year forward interest rate equals (1 + f4) * (1 + fs) – 1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (Round your answer to 2 decimal places.) (1 + Y55 (1 + Y3) - 1 2-year loan rate %

Expert Solution

1.
=821.92/670.2=1.2263801850194

2.
=-821.92+821.92/670.2*670.2=0.00

3.
=1000

4.
=-1000*821.92/670.2=-1226.3801850194

5.
=821.92/670.2-1=22.6380185019397%

6.
=821.92/670.2-1=22.6380185019397%

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