Forward Pricing of Fixed Income Forwards

Easy Forward Pricing And Valuation Fixed Income Forwards

John is analyzing the pricing of a fixed income forward contract for a treasury bond with a maturity of 5 years. He wants to determine the forward price of the bond that he will agree to pay in 1 year, assuming the current yield on similar bonds is 3% and the bond's coupon rate is also 3%.

The notional amount of the bond is $100,000, and it pays semi-annual coupons. John is particularly interested in understanding how the forward price reflects the market conditions and the characteristics of the bond itself.

The forward price is calculated as $100,000.

The forward price is determined by the present value of the future cash flows, which will adjust based on the coupon payments.

The forward price is equal to the spot price of the bond at the commencement of the forward contract.

Hint

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