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The prices of two zero-coupon bonds are as follows: Maturity Price Year 1 84.18 Year 2 75.83 Each bond makes a single payment of 1,000
The prices of two zero-coupon bonds are as follows: | |||||
Maturity | Price | ||||
Year 1 | 84.18 | ||||
Year 2 | 75.83 | ||||
Each bond makes a single payment of 1,000 at maturity. Suppose that you expect to receive 10,000 at the end of year 1 and plan to invest it for one year till the end of year 2, show that you can use the above two zero-coupon bonds to lock in a rate of return for your investment between year one and year two. Don't forget to illustrate the cash flow until the bonds reach their maturity. |
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