Question
Given the following spot rates on 1-year to 4-year zero coupon bonds: Year Spot Rate 1year= 8.0%, 2year= 8.5%, 3 year= 9.0%, and 4year= 9.5%
Given the following spot rates on 1-year to 4-year zero coupon bonds: Year Spot Rate 1year= 8.0%, 2year= 8.5%, 3 year= 9.0%, and 4year= 9.5%
1- What is the equilibrium price of a four-year, 9% coupon bond paying a principal of $100 at maturity and coupons annually?
2- If the market prices the four-year bond such that it yields 10%, what is the bonds market price?
3- What would arbitrageurs do given the prices you determined in (a) and (b)? What impact would their actions have on the market price?
4- What would arbitrageurs do if the market price exceeded the equilibrium price? What impact would their actions have on the market price?
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