Question

X company issued Two types of bonds in order to raise money for its projects, those two types of bonds are as below

1. One-year maturity bond with a rate of return 6%
2. Two-year maturity bond with a rate of return 9%
Y company issued two bonds in order to raise money for itsprojects, those are as below
1. One-year maturity bond with a rate of return 10%
2. Two-year maturity bond with rate of return 13% Calculate the forwardrate of X company and Y company?
• Forward rate of X company is 10.78% and Y company is13.85%
• Forward rate of X company is 10.78% and Y company is16.08%
• Forward rate of X company is 12.08% and Y company is13.85%
• Forward rate of X company is 12.08% and Y company is16.08%

Answer 1

The forward rate for X Company is approximately 10.85%, and the forward rate for Y Company is approximately 16.08%. This is calculated using the one-year and two-year bond rates for each company to solve for the forward rate.

Step-by-step explanation:

To calculate the forward rate for both X and Y companies, we use the formula for forward rates which derived from the interest rates of the one-year and two-year bonds. This involves taking the (1 + two-year rate)^2 = (1 + one-year rate) * (1 + forward rate), and solving for the forward rate. We do this separately for each company.

For X Company:
1.06 * (1 + forward rate of X) = (1.09)^2
(1 + forward rate of X) = (1.09)^2 / 1.06
forward rate of X = (1.09)^2 / 1.06 - 1
forward rate of X = 1.1881 / 1.06 - 1
forward rate of X ≈ 1.1085 - 1
forward rate of X ≈ 0.1085 or 10.85%

For Y Company:
(1 + forward rate of Y) = (1.13)^2 / 1.10
forward rate of Y ≈ (1.13)^2 / 1.10 - 1
forward rate of Y ≈ 1.2769 / 1.10 - 1
forward rate of Y ≈ 1.1608 - 1
forward rate of Y ≈ 0.1608 or 16.08%

Thus, the correct forward rates are 10.85% for X Company and 16.08% for Y Company.