Consider 1-year and 2-year spot rates of r(1) = 6.2% and r(2) = 8.2% Consider the...
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Consider 1-year and 2-year spot rates of r(1) = 6.2% and r(2) = 8.2% Consider the following bonds: Bond A: 2-year, 5% coupon bond; fairly priced Bond B: 2-year, 7% coupon bond; fairly priced Bond C: 2-year, zero-coupon bond; incorrectly priced at $83 a) (1 point) Calculate bond C's fair price. b) (3 points) Find an arbitrage strategy by trading the 3 bonds available to you, replicating the cash flows from Bond C. How many of each bond will you trade? Which bonds would you buy or sell? For reference, fill out the following table: Buy or Sell Buy or Sell Buy or Sell e.g. BUY Number of Bonds: Number of Bonds: Number of Bonds: 3 Bonds Of Bond A Of Bond B Of Bond C Of Bond X Consider 1-year and 2-year spot rates of r(1) = 6.2% and r(2) = 8.2% Consider the following bonds: Bond A: 2-year, 5% coupon bond; fairly priced Bond B: 2-year, 7% coupon bond; fairly priced Bond C: 2-year, zero-coupon bond; incorrectly priced at $83 a) (1 point) Calculate bond C's fair price. b) (3 points) Find an arbitrage strategy by trading the 3 bonds available to you, replicating the cash flows from Bond C. How many of each bond will you trade? Which bonds would you buy or sell? For reference, fill out the following table: Buy or Sell Buy or Sell Buy or Sell e.g. BUY Number of Bonds: Number of Bonds: Number of Bonds: 3 Bonds Of Bond A Of Bond B Of Bond C Of Bond X
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Answer rating: 100% (QA)
To calculate bond Cs fair price we can use the concept of present value The fair price of a bond is the present value of its future cash flows Bond C ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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