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Q4 (Essential to cover) Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8% (risk
Q4 (Essential to cover) Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8% (risk free and regardless of the time-to-maturity of the loan). Further suppose that there is a two-year risk-free coupon bond trading with a face value of $100 and a coupon rate of 20% trading in the market. Price the bond using an explicit no-arbitrage argument. Q5 (Essential to cover) Suppose that the bond in the previous question is actually trading for $120. Show how you could exploit the mispricing to make an arbitrage profit
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