Explanation:
We first calculate the present value of income:
I = 5(1.04)^{-1} + 5(1.04)^{-2} = 9.43047 \approx \`$9.43`
Now, since this is a known-income case, we use the formula:
Where:
Thus,
F = (80 - 9.43)(1.04)^3 = \`$79.38`
Q.4898 Suppose that John enters into a 3-year forward contract on a bond. The spot price of the bond is USD 80. The bond is expected to provide a coupon of USD 5 at the end of the $1^{\text{st}}2`^{\text{nd}}$ year. The annually compounded risk-free rate for all maturities is 4% per year. What is the 3-year forward price?
A
$89.99
B
$79.38
C
$84.79
D
$83.90
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