frm level i urgent

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frm level i urgent

Postby shah.vishal » Sun May 12, 2013 9:33 pm

The price of a 3?year zero coupon government bond is 85.16. The price of a similar 40year bond is 79.81. What is the one-year implied forward rate from year 3 to year 4?
Please help for solution with step and concept

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Joined: Mon Apr 08, 2013 1:36 pm

frm level i urgent

Postby vnraghuveer » Tue May 14, 2013 9:50 am

Dear Vishal,
I think there was a typing error. It must be 4 year bond price which is 79.81. Notify us if we're wrong but for the time being, let's solve assuming it's 4 year and not 40 years.
The price of a zero coupon bond which matures in a year is nothing but the face value discounted by the corresponding rate which applies to that period.
So, here the price difference between a 3 year bond and a 4 year bond is nothing but the discount applied by the forward rate between 3rd and 4th year.
i.e. the 85.16/(1+f) = 79.81. which gives f = 6.7%

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