Question: Construct a synthetic one-year zero-coupon bond using the information. All bonds are free of default risk and have face value equal to $100. The annual

Construct a synthetic one-year zero-coupon bond using the information. All bonds are free of default risk and have face value equal to $100. The annual coupon of 12% is paid in semi-annual installments. SHOW ALL STEPS.

Term to maturity Price Coupon

6 months$940

1 year$105 12%

Find the profitable arbitrage opportunity if the price of a one-year zero coupon bond in the market is $85. Be specific in your answer (e.g. show all cash flows).

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