7 A bond foward A certain I0year bond is curently selling fo

7. (A bond foward) A certain I0-year bond is curently selling for $920 A friend of youis owns a foiward contract on this boncd thal has a delivery datc in ycarand a delivciy pricc of $940 The bond pays coupons of S80 every ? months, with one due months from now and another just before maturity of the forwid The cuIment inteiest ates for 6 months and l year (compounded seniannually)are 7% and 8%, respectively (annual rates compounded cvery 6 months) What is the curient value of the forward contiact?

Solution

The current value is 920-(80/1+0.07/2)-(80/(1+0.08/2)^2-940/(1+0.08/2)^2 920-77.29-73.96-869.08 -100.33