The price of one-year bond a with zero coupon and face, Ask an Expert

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The price of one-year bond (A) with zero coupon and face value $ 1000 is $ 961.5. The price of two-year bond (B) with zero coupon and face value $ 1000 is $ 907. Consider a third bond (C), a two-year bond with $ 100 coupon paid annually and face value of $ 1000.

(i) What must be the price of bond C so that the Law of One Price holds. Explain where you use LOOP.

(ii) Suppose that the price of bond C is $ 1000. Construct an arbitrage portfolio of bonds (assuming that bonds can be sold short at the same prices).

(iii) Find yield-to-maturity of each bond.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92875696

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