# Answer to Question #70574 in Finance for Nick Mango

Question #70574

• A coupon bond with a coupon rate of 8% and a face value of $1,000. Coupons

are paid out annually and the bond has 1 year to maturity. The current coupon

has just been paid out. The current price of the bond is $1018.772.

• A zero coupon bond with a face value of $1,000 and 2 years to maturity. The

bond trades at $907.029.

• An annuity that pays $50 every year for the next 3 years. The next payment will

be a year from now and the last payment will be 3 years from now. The annuity

is currently worth $136.967.

All these securities are risk-free. Note that there is no direct borrowing and lending

here, so if you want to borrow (lend) you need to sell (buy) an appropriate bond.

(c) Expectations theory of interest rates. He wonders

what the price of the zero coupon bond will be in a year. Compute the expected price for him.

(d) RBC offers a forward rate over year 2, f2, of 4%. That rate is good for a loan or

deposit of $10,000. Can you make money and eat a free lunch at RBC’s expense? If so, how?

are paid out annually and the bond has 1 year to maturity. The current coupon

has just been paid out. The current price of the bond is $1018.772.

• A zero coupon bond with a face value of $1,000 and 2 years to maturity. The

bond trades at $907.029.

• An annuity that pays $50 every year for the next 3 years. The next payment will

be a year from now and the last payment will be 3 years from now. The annuity

is currently worth $136.967.

All these securities are risk-free. Note that there is no direct borrowing and lending

here, so if you want to borrow (lend) you need to sell (buy) an appropriate bond.

(c) Expectations theory of interest rates. He wonders

what the price of the zero coupon bond will be in a year. Compute the expected price for him.

(d) RBC offers a forward rate over year 2, f2, of 4%. That rate is good for a loan or

deposit of $10,000. Can you make money and eat a free lunch at RBC’s expense? If so, how?

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