Forward rate question following, question, forward, please, annual

franzino

Hi,
Could you please help me solve the following question :
Consider two annual bonds, each with two years to maturity. Bond A has a 7 % coupon and a price of 1,000.62$. bond B has a 10% coupon and a price of 1,055.12$. Find the two one-period forward rates that must hold for these bonds.
Answer : 6,08 % and 7.92 %

ayodayo

Looks like you must solve simultaneous equations:
1) 1000.62 = 70/(1+r1) + 1070/(1+r2)^2
2) 1055.12 = 100/(1+r1) + 1100/(1+r2)^2
And then do what you need to find the forward rates. I’m too lazy to do the math…

smartpants

6.02 & 7.99

invic

but if I insert the answer into r1 and r2, I don’t end with the correct price….

KungFuPanda

ohai wrote:
Also, the question is a bit weird. They want ”two one-period forward rates”. What is the first period? Is this the period from t=0 to t=1 year?
Yes I’m guessing it means r1 & 1f2.
FeRMioN wrote:
6.02 & 7.99
Got the same answers on that assumption:
r1=0.060206
r2=0.069991
1f2=0.079867
Although they are slightly off to the ones given..