Suppose that the prices of zero coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000.
|
Maturity (Years) |
Price |
|
1 |
$925.93 |
|
2 |
853.39 |
|
3 |
782.92 |
|
4 |
715.00 |
|
5 |
650.00 |
a. Calculate the forward rate of interest for each year.
b. How could you construct a 1 year forward loan beginning in year 3? Confirm that the rate on that loan equals the forward rate.
c. Repeat (b) for a 1 year forward loan beginning in year 4.