Construct a synthetic one-year zero-coupon bond using the information. All bonds are free of default risk and have face value equal to $100. The annual coupon of 12% is paid in semi-annual installments. SHOW ALL STEPS.

Term to maturity Price Coupon

6 months$940

1 year$105 12%

Find the profitable arbitrage opportunity if the price of a one-year zero coupon bond in the market is $85. Be specific in your answer (e.g. show all cash flows).

Answer rating: 100% (QA)

To construct a synthetic oneyear zerocoupon bond we need to replicate the cash flows of a oneyear ze... View the full answer