The following table provides the prices of four zero coupon bonds with par values of 100...
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The following table provides the prices of four zero coupon bonds with par values of 100 that will be maturing at the end of years one to four. i) ii) iii) Bonds A B D Maturity Zero Coupon Bonds Current Prices Year 1 Year 2 Year 3 Year 4 96.1538 88.9996 81.6298 74.8801 Determine the rates of return offered on the zero coupon bonds and use these rates to value a four year coupon bond that pays an annual interest rate of 6.5 per cent. (2 marks) Develop a portfolio made up of the zero coupon bonds that replicates the cash flows for the coupon bond. (2 marks) Explain why zero coupon bonds may be of some significance in the valuation of coupon bonds. (3 marks) The following table provides the prices of four zero coupon bonds with par values of 100 that will be maturing at the end of years one to four. i) ii) iii) Bonds A B D Maturity Zero Coupon Bonds Current Prices Year 1 Year 2 Year 3 Year 4 96.1538 88.9996 81.6298 74.8801 Determine the rates of return offered on the zero coupon bonds and use these rates to value a four year coupon bond that pays an annual interest rate of 6.5 per cent. (2 marks) Develop a portfolio made up of the zero coupon bonds that replicates the cash flows for the coupon bond. (2 marks) Explain why zero coupon bonds may be of some significance in the valuation of coupon bonds. (3 marks)
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Related Book For
Introduction to Management Science A Modeling and Cases Studies Approach with Spreadsheets
ISBN: 978-0078024061
5th edition
Authors: Frederick S. Hillier, Mark S. Hillier
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