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11) You are a bond trader and observe the following four US government bonds trading in the market. The market interest rate is 7%. Bonds
11) You are a bond trader and observe the following four US government bonds trading in the market. The market interest rate is 7%. Bonds A, B, and C trade at their fair prices. A: A ten-year zero coupon bond trading at $508.35 B: A ten-year 7% annual coupon bond trading at $1,000.00 C: A ten-year 4% semi-annual coupon bond trading at $794.13 D: A ten-year 6% semi-annual coupon bond trading at $900.00 Your broker tells you that bond D is underpriced. Explain how you can replicate bond D using the other existing bonds to profit from this mispricing [5]
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The Finance Book
Authors: Stuart Warner, Si Hussain
2nd Edition
1292401982, 978-1292401980
