Question

The following annual forward rates are available in the market today: F0,1 = 0.80%, F1,2 = 1.12%, F2,3 = 3.94%, F3,4 = 3.28% and F4,5 = 3.14%. The value per 100 of par value of a three-year, 9.5% coupon bond, with interest paid annually, is closest to:
       a. 122.10
       b. 124.17
       c. 105.82.
       d. 105.99
       e. 125.91

Answer 1

Let us calculate the intrinsic value of the zero-coupon bond.

The intrinsic value of the bond is the present value of all the cash flows.

Accordingly, the present value of the cash flow can be calculated using the following table.

Year	Cash flows	Discount factor	Present Value
1	9.5	1/1.08	9.4246
2	9.5	1/(1.08*1.0112)	9.3202
3	109.5	1/(1.08*1.0112*1.0394)	103.3556

Hence the total PV is 122.1004

Please be noted that F 0,1 means from today for a period of 1 year the rate of interest is 0.8%

F1,2 means after 1 year for a period of 1 year the rate of interest is 1.12%

Similarly it can be taken for other items also.