Pat is considering buying a Kool bond that will generate $800, $900, $1,400 and $600 for years
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Question:
Pat is considering buying a “Kool” bond that will generate $800, $900, $1,400 and $600 for years 1-4 respectively. The current market rates on a 1,2,3,4 year zero coupon bonds are 1.675%, 2.275%, 3.425%, 4.575%, respectively. The zero-coupon bonds have a par-value of $1,000.
What is the value of the following bonds:
- 1-year zero coupon bond
- 2-year zero coupon bond
- 3-year zero coupon bond
- 4-year zero coupon bond
Assuming the risk level of the Kool bond is similar to that of the zero-coupon bonds, what price should Pat be willing to pay for the bond?
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