Consider the information on bonds available in the marketplace as reported:

2-year, 9% coupon paid semi-annually, YTM = 4.2% every 6 months, FV = $1,000

6-month zero with FV of $1,000 sells for $965.24

1-year zero with FV of $1,000 sells for $921.54

18-month zero with FV of $1,000 sells for $876.47

2-year zero with FV of $1,000 sells for $833.49

(a) Show how you could invest in the zero coupon bonds to create the exact same payoff as what you would receive from the 9% coupon bond. (Assume bonds are available in any face value desired).

(b) What would be the total cost of the portfolio of zero coupon bonds you assemble in part (a)?

(c) Given your answer to (b) would you prefer to purchase the 9% coupon bond or the portfolio

of zero coupon bonds?