CAS Exam 9 Spring 2017, Question 10
Study guide: Exam 9
Given the following:
| Bond | Par Value | Time To Maturity (years) | Current Bond Price |
|---|---|---|---|
| 1 | $100 | 1 | $96.15 |
| 2 | $100 | 2 | $91.40 |
| 3 | $100 | 3 | $85.40 |
- Assume annual compounding.
- All bonds are zero-coupon bonds.
Part a (0.75 points)
Calculate the forward rate in year three.
Part b (0.5 points)
An investor wants to borrow $100 two years from now for one year.
Outline a strategy the investor could take to construct a synthetic forward loan and identify all of the investor's cash flows.
Part c (0.75 points)
Using a theory of term structure, explain why an investor would want to construct a synthetic forward loan.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution