Suppose you have a risk-free bond that has a face value of $100, a four-year maturity, pays a 5 percent coupon with annual coupons. The current prices of risk-free, zero-coupon bonds (per $100 face value) are provided in the table below.
Year Price:
Year 1- $97
Year 2- $94
Year 3- $93
Year 4- $90
Questions:
1. What is the price of the bond today?
2. What are the forward rates for each one year period?
F_{1,1} =
F_{2,1} =
F_{3,1}=
3. What is the expected price of the bond in two years, assuming that the forward rates are unbiased estimates of future spot rates?
4. What is the holding period return assuming that you reinvested the coupons?