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  3. 7. consider a one-year coupon bond with face value

7. Consider a one-year coupon bond with face value of $100 and coupon payment equal...

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Finance

7. Consider a one-year coupon bond with face value of $100 and coupon payment equal to $10 paid every 6 months. The market interest rate on similar coupon

bonds is 12%.

SHOW ALL STEPS.

(a) Find the price of the one-year coupon bond.

(b) Assume a one-year zero coupon bond is priced at $93. Find the bonds

yield to maturity.

(c) The current yield on 6 mo. bonds is 7%.

(d) Create a synthetic one-year zero-coupon bond from the coupon bond.

(e) Find the profitable arbitrage possibility. Show carefully why this works by

filling in the table below to show the cash flows.

ACTION TODAY

Today

In 6 mo.

In one year

Answer & Explanation Solved by verified expert
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