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You would like to create a 2-year synthetic zero-coupon bond. Assume you are aware of the following information: 1-year zero-coupon bonds are trading for $0.93
- You would like to create a 2-year synthetic zero-coupon bond. Assume you are aware of the following information:
- 1-year zero-coupon bonds are trading for $0.93 per dollar of face value
- 2-year 7% coupon bonds (annual payments) are selling at $985.30, face value $1000.
- 1-year zero-coupon bonds are trading for $0.93 per dollar of face value
- 2-year 7% coupon bonds (annual payments) are selling at $985.30, face value $1000.
Assume that you can purchase the 2-year coupon bond and unbundle the two cash flows and sell them. Call the cash flow arising from the first year as Strip 1, and the cash flow arising from the second year as Strip 2.
- How much will you receive from the sale of Strip 1?
- How much do you need to receive from the sale of Strip 2 to break even?
- How much should your 2-year synthetic zero-coupon bond trade for, per dollar of face value?
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