Hi, I have been working thru the Fixed Income: Valuation Concepts section the past two days. I had some questions that I was hoping to get some help with understanding this stuff. 1. Swap Fixed Rate (Ex:2yr) - (P1+P2)+P2=1 - The questions I have encountered on this thus far have provided the prices a $1 par ZC bonds. I assume this is because these are pure discount instruments (which I assume to mean that the $1 value is essentially the discount, please let me know if this accurate). Why/how are these ZC rates linked to the above formula/swap fixed rate? 2. Spot and forward pricing - I still don’t quite understand what the forward encompass when compared to the spot. For example: 2ySpot - 5%, 5ySpot - 7%: [1+f(2,3)] = (1+S5)^5/(1+S2)^2 So essentially the forward in two years for a 3yr investment = 1.40255/1.10250 = 1.27215 - annual @ 8.354%. The way I understand the fwd rate is that it is the driving factor to make investors indifferent between the 2yr investment rolled over into a 5y or just the 5yr investment. Hopefully I am still on track with the above because the next two parts I get completely lost. I ran into a couple problems in the QBank where they were able to derive actual prices and determine arbitrage opportunities. The second issue is understanding what is actually changing hands I guess is the best way to put it. 2a. F(2,1) = P3/P2 = $98.98 The forward price of a security was determined at 98.98 by looking at ZC 3yr bond price at 91.51(Given) and a ZC 2yr at 92.45 (Given). The forward price of the ZC 2yrs from today for 1yr was given at 94.55. However the forward determined a price as of 98.98. The answer to this might determine the second part that I wasn’t understanding which is what is actually happening from a security perspective. The answer says buy the 2yr bond in the spot market(not sure what that means about in the spot market) and going long a fwd contract and selling the 3yr in the spot market. What is happening here? What has the fwd actually done? 2b. Forwards are suppose to make spots for different maturities in theory equivalent. Fine with that part, but lets says I buy a 2 year forward contract but I have an investment horizon of 5 years. What do I get at the end of two years and do I just jump into a bond/security at expiration of the forward? What cashflows does the forward produce? Seems like there would be less transaction costs to buy the 5 year bond and hold it? These questions are all in the realm of pure expectations theory as I am just trying to understand what actually happens. Is my money locked up in a forward accruing at what rate? My apologies for the wall of text. I had a rough time with some of these questions the last two days and the sch. book didn’t do much justice.