You are given the following information: Bond A is a 1-year, 6% coupon bond with face value
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Question:
You are given the following information:
- Bond A is a 1-year, 6% coupon bond with face value $8,000 and YTM = 4%
- Bond B is a 2-year, zero coupon bond with face value $30,000 and YTM = 6%
- Bond C is a 3-year, 7% coupon bond with face value $20,000 and YTM = 7%
- Bond D is a 4-year, zero coupon bond with face value $8,000 and YTM = 9%
- Bond E is a 5-year, zero coupon bond with face value $2,000 and YTM = 11%
A financial institution is offering the following product:
- The client pays the financial institution $200,000 at t = 0 and another $100,000 at t = 1
- The financial institution pays the client $40,000 at t = 2, X at t = 3, and $60,000 at t = 4
a) What would X have to be in order for the product to be fairly priced? (Hint: bootstrap the yield curve and then set PV(client cash to bank) = PV(bank cash flow to client).
Related Book For
Basic Finance An Introduction to Financial Institutions Investments and Management
ISBN: 978-1111820633
10th edition
Authors: Herbert B. Mayo
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