You are given the following information:

• Bond A is a 1-year, 6% coupon bond with face value $8,000 and YTM = 4%
• Bond B is a 2-year, zero coupon bond with face value $30,000 and YTM = 6%
• Bond C is a 3-year, 7% coupon bond with face value $20,000 and YTM = 7%
• Bond D is a 4-year, zero coupon bond with face value $8,000 and YTM = 9%
• Bond E is a 5-year, zero coupon bond with face value $2,000 and YTM = 11%

A financial institution is offering the following product:

• The client pays the financial institution $200,000 at t = 0 and another $100,000 at t = 1
• The financial institution pays the client $40,000 at t = 2, X at t = 3, and $60,000 at t = 4

a) What would X have to be in order for the product to be fairly priced? (Hint: bootstrap the yield curve and then set PV(client cash to bank) = PV(bank cash flow to client).

Answer rating: 100% (QA)

To determine the value of X that would make the financial product fairly priced we need to bootstr... View the full answer