Explain how to replicate a pure-discount bond

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Reference no: EM131950413

There are two bonds in the market. Bond A is a coupon bond with a nominal value of $60, maturing in one year, with coupon of $5 paid every six months. Bond B is a six-month pure-discount bond which pays $60. Suppose that the monthly effective interest rate is 1%. (a) What is the non-arbitrage price of the bonds? (b) Explain how to replicate a pure-discount bond maturing in one year, by using a combina- tion of the bonds in the market.

Reference no: EM131950413

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