you observe the following: a 2-year coupon bondpaying 10% annual coupons with a market price of $97,
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Question:
you observe the following: a 2-year coupon bondpaying 10% annual coupons with a market price of $97, and two annuities thatare trading at the same market price as each other. The first annuity matures in 3years and pays annual cash flows of $20, while the second annuity pays annualcash flows of $28 and matures in 2 years. Using this information:
i.Complete the term structure of interest rates, i.e. determine the one- andtwo-year discount factors, d1 and d2, respectively.
ii.Determine the price of the annuities.
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