MFIN6003 Derivative Securities

Dr. Huiyan Qiu

Session Four/Five: In-Class Exercise on Interest Rate Forward
1. The coupon rates on one-year, two-year, and three-year par coupon bonds are 5%, 5.97%,
and 6.91%.
a. What are the bond yields for one-year zero-coupon bond, two-year zero-coupon
bond, and three-year zero-coupon bond, respectively? (They are the discount rate
for cash flows in corresponding years.)
b. What is the implied forward rate from year 2 to year 3?
c. What is the forward price for a one-year zero-coupon bond which will be issued in
year 2?

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MFIN6003 Derivative Securities

Dr. Huiyan Qiu

2. Following table provides the information on zero-coupon bonds maturing at different
days.

Days to Maturity 90 180 270 360

Zero-Coupon Bond Price 0.99009 0.97943 0.96525 0.95238

a. What is the rate on an FRA for a 180-day loan commencing on day 180?
b. Suppose you are the counterparty for a borrower who uses the FRA to hedge the
interest rate on a $10m loan. What positions in zero-coupon bonds would you use to
hedge the risk on the FRA?