Question: A- Zero Coupon Bond Face Value-$100 (No coupon) Maturity- 1 year Price- $91.00 B-Coupon Bond Face Value- $100 8% Coupon-8% Maturity-2 years Price- $103.00 A)

A- Zero Coupon Bond Face Value-$100 (No coupon) Maturity- 1 year Price- $91.00

B-Coupon Bond Face Value- $100 8% Coupon-8% Maturity-2 years Price- $103.00

A) Using bonds A and B find a price of a bond C with a maturity of 2 years, face value of $200, and an annual coupon rate of 1.5%.

B) Suppose that you would like to purchase a two-year coupon bond with a face value of $500 and a coupon rate of 4% (with annual coupon payments). Since such a bond is not traded in this economy, what portfolio of bonds A and B could you form to satisfy your needs (i.e. how can you replicate this bond using the original bonds A and B). Note: Make sure to describe that portfolio clearly, i.e. what you are buying/selling.

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