CFA Practice Question

CFA Practice Question

Today is January 1, 20X1. A Treasury bond with 6 years to maturity and six-monthly coupons of $20 (payable on January 1 and July 1) has a yield of 3.8%. The six-month spot rate is 3.1%, the 12 month spot rate is 3.4%, and the 18 month spot rate is 3.57%. Suppose you have entered into the long side of the F(0,18 mo) forward contract for this bond (18 mo means settlement on July 1, 20X2). On July 1, 20X1 the yield on the bond rises to 3.9%, the six-month spot rate is 3.4%, and the 12 month spot rate is 3.6%. Calculate the value of the forward contract on July 1, 20X1 that you had entered into six months earlier.
A. -3.67
B. -3.54
C. -3.42
Explanation: First find the forward price. Find the PV of the next three dividends = $57.9978. Then subtract this PV from the bond price today = $1,010.64 - $58.00 = $952.64. Finally multiply last number by (1+r)^3 to get the forward price = $952.64 * (1+0.01785)^3 = $1,004.57

Similarly calculate the forward price on July 1, 20X1 to be $1,001.03. Now change in forward price = $1,001.03 - $1,004.57 = -$3.54. This needs to be discounted by 2 six month periods as settlement is on July 1, 20X2, whereas we need value on July 1, 20X2. Discounting gives = -$3.54 / (1+0.018)^2 = -$3.41

User Contributed Comments 10

User Comment
jpducros I need an aspirin !
Zawerthal I need someone to give me the questions for the exam, and I don't care if it's against standard III,IV or whatever! Ootherwise there's no way I'll pass.
arudkov such a questions burn. i didnt guess(((
jasmine23 Help~ I cant even get the price of $1010.64
Sandar i m going crazy
Mikehuynh For this type of question, just skip and move on. Do it when you finish all the others.
catsong I am glad I'm not alone... Going insane here as well... not much time left...
jimmy454 that would easily take more than 1.5 minutes. I would like to see anyone do it under that. Have to remember F = S.(1+r)^(t)
moneyguy moving on... I wouldn't even attempt this on exam day. 25% chance to get it right, I guess. I do understand the general idea, but I would definitely spend too much time.
enetis just reading, understanding and trying to line up the calcs prob took me 2 min in of itself.
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