Suppose that a 5 year coupon bond of face value $ 100 and coupon rate 3% sells
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Question:
Suppose that a 5 year coupon bond of face value $ 100 and coupon rate 3% sells for $ 98 dollars, and that a 5 year coupon bond of face value $100 and coupon rate 7 % sells for $ 102. Both bonds pay coupons annually.
(a) What portfolio composed of these two dierent bonds replicates the payouts of a 5 year coupon bond of face value $ 100 and coupon rate 5%?
(b) If there is no arbitrage, what would be the price of this 5 % coupon bond?
(c) Suppose this 5 % coupon bond sold for a price of $ 99. What arbitrage trade could you make to get a riskless profit today in exchange for nothing in the future?
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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