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There is a 5-year zero coupon bond with a face value of $1000(assuming no risk). The risk free rate is 4%, i.e. you can borrow
There is a 5-year zero coupon bond with a face value of $1000(assuming no risk). The risk free rate is 4%, i.e. you can borrow and lend at 4%. Suppose the current price of the bond is $950. 1. What is the equilibrium price of the bond at t=0? 2. Evaluate the desirability of the purchase of the bond using NPV method. 3. Evaluate the desirability of the purchase of the bond using IRR method. 4. You can take advantage of the mispricing. Construct an arbitrage portfolio that you can take money now(t0). What is the amount of the arbitrage profit
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