Assume that there are two three-year bonds with face values equaling $1000. The coupon rate of Bond
Question:
Assume that there are two three-year bonds with face values equaling $1000. The coupon rate of Bond A is 0.05 and 0.08 for Bond B. A third Bond C also exists, with a maturity of two years. Bond C also has a face value of $1000; it has a coupon rate of 11%. The prices of the three bonds are $878.9172, $955.4787, and $1055.419, respectively.
a. What are the spot rates implied by these bonds?
b. Find a portfolio of Bonds A, B, and C which would replicate the cash flow structure of Bond D, which has a face value of $1000, a maturity of three years, and a coupon rate of 3%.
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Step by Step Answer:
a First solve the following system for the discount functions d We find that D 1 0943396 ...View the full answer
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