Question: Bond # 1 2 3 4 1-year strip bond 2-year strip bond 2-year 6% coupon bond 2-year 7% coupon bond Purchase price ($xxxx.xx) 950.00 Time

Bond #

1

2

3

4

1-year strip bond

2-year strip bond

2-year 6% coupon bond

2-year 7% coupon bond

Purchase price ($xxxx.xx)

950.00

Time 1 cash flow

+1000.00

0

+60.00

+70.00

Time 2 cash flow

0

+1000.00

+1060.00

+1070.00

Yield to maturity (xx.xx%)

5.50%

  1. What is the yield to maturity on Bond #1? (2 marks)
  2. What is the price of Bond #3? (2 marks)
  3. You are considering two investments from the bonds listed in the table.

Portfolio 1: 60 units of Bond #1 + 1060 units of Bond #2

Portfolio 2: 1000 units of Bond #3.

Show that the future cash flows from these two portfolios would be identical, in amount and timing. (2 marks)

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