4. Today (at time t = 0) suppose that there is a 1-year zero-coupon bond with a price of $98.02 and a 2-year zero-coupon bond with a price of $94.18 traded on the market. Both bonds have a principal of $100. Assume that you are able to buy and short sell both bonds today at their quoted prices. (a) What is today's 1-year forward interest rate fo(1, 2) (for year 2, continuously compounded and in % per annum) implied by the given zero-coupon bond prices?
4. Today (at time t = 0) suppose that there is a 1-year zero-coupon bond with a price of $98.02 and a 2-year zero-coupon bond with a price of $94.18 traded on the market. Both bonds have a principal of $100. Assume that you are able to buy and short sell both bonds today at their quoted prices. (a) What is today's 1-year forward interest rate fo(1, 2) (for year 2, continuously compounded and in % per annum) implied by the given zero-coupon bond prices?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:4.
Today (at time t = 0) suppose that there is a l-year zero-coupon bond with a price
of $98.02 and a 2-year zero-coupon bond with a price of $94.18 traded on the market. Both
bonds have a principal of $100. Assume that you are able to buy and short sell both bonds
today at their quoted prices.
(a) What is today's 1-year forward interest rate fo(1, 2) (for year 2, continuously compounded
and in % per annum) implied by the given zero-coupon bond prices?
(b) Suppose that someone is offering you a l-year forward rate fo(1, 2) for year 2 of 5% per
annum (continuously compounded). Is there an arbitrage opportunity? If yes, explain
carefully how the arbitrage strategy would look like.
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