Problem 15:18 Suppose that you want to construct a 2- year maturity forward loan
ID: 2643859 • Letter: P
Question
Problem 15:18
Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000.
Suppose that you buy today one 3-year maturity zero-coupon bond. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero? (Do not round intermediate calculations. Round your answer to 4 decimal places.)
What are the cash flows on this strategy in each year? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.Omit the "$" sign in your response.)
The prices of zero-coupon bonds with various maturities are given in the following table.
Explanation / Answer
a)
no of 5-year maturities to sell = 839.92/695.66 = 1.2074
b)
at time 0 , cash flow = 0
at time 3, cash flow = 1000 (3-year zero matures and recieves facevalue)
at time 5, cash flow = 1.2074 * 1000 = 1207.40