Suppose that at time 0: (1) a 3-year annual coupon bond with 10% coupon rate...
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Suppose that at time 0: (1) a 3-year annual coupon bond with 10% coupon rate trades at par, and (2) a 2-year zero coupon bond with face value $100 trades at $95. Denote P the time 0 price of a bond with the following (somewhat unusual) risk-free cash flows Year 1 cash flow = $20 Year 2 cash flow = $0 Year 3 cash flow = $220 a. Suppose there are no transaction costs. Then the price must be P=$. (answer an integer). b. Suppose that each bond must be traded through a different broker, and each broker requires a fixed fee of $1 per short transaction, irrespectively of the size of the transaction. There are no transaction costs for buying. The minimal price possible price is P= $_ (answer an integer)
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