Forward Pricing for Fixed Income Forwards

ABC Corporation is structuring a fixed income forward contract to hedge its bond portfolio, which consists primarily of a long position in a 10-year zero-coupon bond with a face value of $1 million. The bond's yield is currently 4.5%, and the market interest rate for similar duration bonds is expected to shift to 5.5% in three years. The forward contract will settle in three years, and ABC expects to enter into this contract to lock in the yield. Determine the forward price of the bond at contract initiation, assuming no arbitrage opportunities and that the forward contract specifies delivery of the bond at the end of the forward contract period.

Use the formula: Forward Price = Spot Price × (1 + r_f)^(T-t), where r_f is the risk-free rate and T-t is the time to maturity of the forward.