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You have the following information about several bonds: Cash Flows Bond Price (Year 0) Year 1 Year 2 Year 3 A 94.34 100 B 181.68
You have the following information about several bonds:
Cash Flows
Bond | Price (Year 0) | Year 1 | Year 2 | Year 3 |
A | 94.34 | 100 | ||
B | 181.68 | 100 | 100 | |
C | 262.18 | 100 | 100 | 100 |
You own bond D, trading in the same market with cash flows of identical risk as bonds A, B, and C. Bond D has cash flows of 500 in year 1, 500 in year 2, and 1000 in year 3. Someone offers to buy bond D from you at a price of $1,718.45. This potential buyer believes that this is a fair price because it implies the same yield-to-maturity as bond C. Should you sell bond D at that price? Explain your answer.
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