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(20pts) 5. The term structure of interest rates for zero-coupon bonds with $100 face value is shown below: Maturity 1 year 2 years 3 years
(20pts) 5. The term structure of interest rates for zero-coupon bonds with $100 face value is shown below: Maturity 1 year 2 years 3 years YTM Price 4.60% 2 4.80% 2 5.00% 2 (5pts) (a) Find the current price of the zero-coupon bonds. (15pts) (b) Consider a three-year coupon bond with a $2000 face value that pays 10% annual coupons. Show that the price of this three-year bond must be equal to a portfolio of the above zero-coupon bonds. What must be the composition of this portfolio? Draw the necessary timelines and show your work. (See the Appendix to Chapter 6)
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