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Suppose that you observe the following four bonds trading in the market. Bond Coupon Time-to-maturity Price A 0% 0.5 99.01 B 0% 1 97.07 C

Suppose that you observe the following four bonds trading in the market.

Bond Coupon Time-to-maturity Price

A 0% 0.5 99.01

B 0% 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. Using yields, calculate the price of bond D if its price were consistent with bonds A, B, and C. Is bond D underpriced or overpriced? Replicate bond Ds cash flows using a portfolio of bonds A, B, and C.

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