Question
The CFO of FIN340 Inc is thinking to issue a 3-year regular coupon bond with a coupon rate of 5% (paid annually) and the face
The CFO of FIN340 Inc is thinking to issue a 3-year regular coupon bond with a coupon rate of 5% (paid annually) and the face value of $1000. However she is not sure of the price/value of this bond. You are a recent graduate from SCSU School of Business and work as an asset-pricing specialist with the CFO of FIN 340 inc. In the bond market, you observe the following zero-coupon bonds with a face value of $100:
Zero-coupon bond (maturity) | Price |
---|---|
One-year | $95 |
Two-year | $90 |
three-year | $85 |
Based on the above information, what is the price of a regular coupon bond that your CFO is contemplating to issue? Assume no default risk and you can buy/sell fraction of zero-coupon bonds. (hint: zero-coupon bonds can be used to replicate a regular coupon bond). Show all work for this problem.
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