Part 1: Zero Curves and Mispricing Suppose that you observe the following four bonds trading in the market. Bond Coupon Time-to-maturity Price A 0% 0.5 99.01 B0% 1 97.07 C 0% 1.5 94.23 D 6 % 1.5 102.30 Coupons are paid semi-annually. All four bonds have a $100 face value. 1. Calculate zero-coupon yields for maturities of 0.5, 1, and 1.5 years using bonds A, B, and C. 2. Using the yields from (1), calculate the price of bond D if its price were consistent with bonds A, B, and C. Is bond D underpriced or overpriced? 3. Replicate bond D's cash flows using a portfolio of bonds A, B, and C. 4. Using your results in (3), construct a long-short portfolio that takes advantage of this mispricing Part 1: Zero Curves and Mispricing Suppose that you observe the following four bonds trading in the market. Bond Coupon Time-to-maturity Price A 0% 0.5 99.01 B0% 1 97.07 C 0% 1.5 94.23 D 6 % 1.5 102.30 Coupons are paid semi-annually. All four bonds have a $100 face value. 1. Calculate zero-coupon yields for maturities of 0.5, 1, and 1.5 years using bonds A, B, and C. 2. Using the yields from (1), calculate the price of bond D if its price were consistent with bonds A, B, and C. Is bond D underpriced or overpriced? 3. Replicate bond D's cash flows using a portfolio of bonds A, B, and C. 4. Using your results in (3), construct a long-short portfolio that takes advantage of this mispricing