Consider the Following Data for Bonds A,B,and C A Calculate the Forward and Spot Rates for Each Period

question 115

Essay

Consider the following data for bonds A,B,and C:
$\begin{array} { l l l l c } & \text { price } & & { \text { cash flows } } \\& t = 0 & t = 1 & t = 2 & t = 3 \\\text { A } & \$ 900 & \$ 1,000 & 0 & 0 \\\text { B } & \$ 1,000 & \$ 100 & \$ 1,100 & 0 \\\text { C } & \$ 900 & \$ 50 & \$ 50 & \$ 1,050\end{array}$
a. Calculate the forward and spot rates for each period.
b. What is the value of the discount function for the first period?
c. What is the yield to maturity for bond C assuming annual payment periods?

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Definitions:

Forward Exchange Rate

An agreed-upon exchange rate for a currency transaction that will occur at a future date, used for hedging or speculation in foreign exchange markets.

Future Rate

The anticipated interest rate or currency exchange rate applicable to financial transactions that will occur in the future.

Spot Exchange Rate

The present rate at which one can purchase or sell a currency for immediate transfer.