5. Consider an 8-month forward contract to buy a coupon-bearing bond that will mature in 1 year from today (t = 0). The current market price of the bond is $800. The bond pays a coupon of $30 every 6 months. Assume that the 6-month and 8-month risk-free interest rates (continuously compounded) are 4% and 5% per annum, respectively. Compute today's (at time t = 0) arbitrage-free forward price.
5. Consider an 8-month forward contract to buy a coupon-bearing bond that will mature in 1 year from today (t = 0). The current market price of the bond is $800. The bond pays a coupon of $30 every 6 months. Assume that the 6-month and 8-month risk-free interest rates (continuously compounded) are 4% and 5% per annum, respectively. Compute today's (at time t = 0) arbitrage-free forward price.
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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A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
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It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
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Transcribed Image Text:Consider an 8-month forward contract to buy a coupon-bearing bond that will
mature in 1 year from today (t = 0). The current market price of the bond is $800. The bond
5.
pays a coupon of $30 every 6 months. Assume that the 6-month and 8-month risk-free interest
rates (continuously compounded) are 4% and 5% per annum, respectively.
Compute today's (at time t = 0) arbitrage-free forward price.
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