Question: This is all the info PROBLEM 4. There are two bonds in the market: Bond A is a coupon bond with a nominal value of

This is all the info This is all the info PROBLEM 4. There are two bonds

PROBLEM 4. There are two bonds in the market: Bond A is a coupon bond with a nominal value of $100, maturing in one year, with coupon of $5 paid every six months. Bond B is a six-month pure-discount bond which pays $100. Suppose that the annual interest rate is 5% compounded monthly. (a) (5 Points) What is the non-arbitrage price of the bonds? (b) (10 Points) Explain how to replicate a pure-discount bond maturing in one year, by using a combination of the bonds in the market

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