Question
Suppose that a 5 year coupon bond of face value $ 100 and coupon rate 3% sells for $ 98 dollars, and that a 5
Suppose that a 5 year coupon bond of face value $ 100 and coupon rate 3% sells for $ 98 dollars, and that a 5 year coupon bond of face value $100 and coupon rate 7 % sells for $ 102. Both bonds pay coupons annually.
(a) What portfolio composed of these two dierent bonds replicates the payouts of a 5 year coupon bond of face value $ 100 and coupon rate 5%?
(b) If there is no arbitrage, what would be the price of this 5 % coupon bond?
(c) Suppose this 5 % coupon bond sold for a price of $ 99. What arbitrage trade could you make to get a riskless profit today in exchange for nothing in the future?
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
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