All bonds in the market have a $1,000 face value. You are faced with the following...
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All bonds in the market have a $1,000 face value. You are faced with the following spot rates: Maturity (years) 1 2 3 Spot rate 2.0% 4.5% 6.0% Suppose you want to create a synthetic forward arrangement from zero-coupon bonds, where you lend $1,000 in 1 year and collect the proceeds at the end of year 2 at an appropriate interest rate derived from this pure yield curve. What would be your position and size of investment in shorter term zero-coupon bonds; and what would be your position and size of investment in longer term zero-coupon bonds? All bonds in the market have a $1,000 face value. You are faced with the following spot rates: Maturity (years) 1 2 3 Spot rate 2.0% 4.5% 6.0% Suppose you want to create a synthetic forward arrangement from zero-coupon bonds, where you lend $1,000 in 1 year and collect the proceeds at the end of year 2 at an appropriate interest rate derived from this pure yield curve. What would be your position and size of investment in shorter term zero-coupon bonds; and what would be your position and size of investment in longer term zero-coupon bonds?
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To create a synthetic forward arrangement you need to combine two zerocoupon bonds with different ma... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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