dratewka2
Nov 10, 2013, 04:46 PM
Hi I've been working on a finance review for my exam and I can't seem to figure this question out hope someone can shed some light.
In the table below you find prices on zero coupon bonds with j years to maturity.
j 1 2 3 4
Bj 95 90 84 78
a) You need to borrow $100 million in two years. Since you are uncertain about future interest rates, you want to get into a forward contract to borrow $100 million two years from now for two years in the form of a discount loan. How would you construct such a forward contract?
b) How can you calculate the duration of a bond that pays $10 next year as well as every year after that in perpetuity? Explain.
Any help or first steps would be appreciated!
In the table below you find prices on zero coupon bonds with j years to maturity.
j 1 2 3 4
Bj 95 90 84 78
a) You need to borrow $100 million in two years. Since you are uncertain about future interest rates, you want to get into a forward contract to borrow $100 million two years from now for two years in the form of a discount loan. How would you construct such a forward contract?
b) How can you calculate the duration of a bond that pays $10 next year as well as every year after that in perpetuity? Explain.
Any help or first steps would be appreciated!