Question: All the bonds in this question have face value $100. Suppose a 2-year bond with 5% coupon rate is currently priced at $100 (i.e., it

All the bonds in this question have face value $100. Suppose a 2-year bond with 5% coupon rate is currently priced at $100 (i.e., it is a par bond), while a 1-year zero coupon bond is currently priced at $94.

What is the current price of a 2-year zero coupon bond consistent with no arbitrage, assuming no transaction costs?

Hint: the 2-year bond with 5% coupon rate pays $105 in year 2. So you need to buy 100/105 units of this coupon bond to obtain a $100 cashflow in year 2

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