Question #39
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 16
Status: Unattempted
Question
Consider a 9-month forward contract on a 10-year 7% Treasury note just issued at par. The effective annual risk-free rate is 5% over the near term and the first coupon is to be paid in 182 days. The price of the forward is closest to:
Answer Choices:
A. 965.84
B. 1,037.27
Explanation
The forward price is calculated as the bond price minus the present value of the coupon,
times one plus the risk-free rate for the term of the forward.
(1,000 – 35/1.05182/365) 1.059/12 = $1,001.84