4. You would like to create a 2-year synthetic zero-coupon bond. Assume you are aware of the following infor- mation: . 1-year zero-coupon bonds are trading for $0.93 per dollar of face value . 2-year 7% coupon bonds (annual payments) are selling at $985.30, face value $1000. (a) What are the two cash flows from the 2-year coupon bond? One of them is a $70 payment to be received at the end of year 1, the other is a $1070 payment to be received at the end of year 2. (b) Assume that you can purchase the 2-year coupon bond and unbundle the two cash flows and sell them. Call the cash flow arising from the first year as Strip 1, and the cash flow arising from the second year as Strip 2. i. How much will you receive from the sale of Strip 1? Strip 1 is effectively a zero-coupon bond, which means it should be sold at $65.10. ii. How much do you need to receive from the sale of Strip 2 to break even? If you bought the 2-year coupon bond at $985.30, and the price of Strip 1 is $65.10, then the price of Strip 2 should be $920.20. (c) How much should your 2-year synthetic zero-coupon bond trade for, per dollar of face value? Strip 2 is effectively a 2-year zero coupon bond. But the price of $920.20 is for a future value of $1070. On a per-dollar basis, the price should be $0.86. You can think about it this way: if the law of one price holds, and the price of a $1070 to be received in two years is $920.20 now, what would the price of a $1.00 to be received in two years be right now