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Compute the annualized spot rates

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Consider the prices of the following zero-coupon bonds, each of which has a face value of 1000. Maturity (half-years) Price 1 968.5 2 929 3 915.2 906 4

a. Compute the annualized spot rates 10,0.5, 10,1.0, r0,1.5, 10,2 implied by the prices given above.

b. Use the spot rates obtained above to price a coupon bond with maturity 2 years (4 semi- annual periods), annual coupon rate of 7%, face value of 1000, and making semi-annual coupon payments. Is the bond selling at a premium or discount?

c. Explain in detail how one could formulate a strategy to profit if the above coupon bond were selling for par

Reference no: EM132704885

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