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The YTM on a 6-month $10 par value zero-coupon bond is 10%, and the YTM on a 1-year $10 par value zero-coupon bond is 14%.
The YTM on a 6-month $10 par value zero-coupon bond is 10%, and the YTM on a 1-year $10 par value zero-coupon bond is 14%. These YTMs are semiannual BEYs. What would be the arbitrage-free price of a 1-year bond with coupon rate of 20% (semiannual payments) and par value of $1000? Assume that this bond is issued by the same company as the zero-coupon bonds.
A. $1056.02
B. $968.68
C. $937.32
D. None of the above.
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