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Find the profitable arbitrage opportunity

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Construct a synthetic one-year zero-coupon bond using the information. All bonds are free of default risk and have face value equal to $100. The annual coupon of 12% is paid in semi-annual installments. SHOW ALL STEPS.

Term to maturity Price Coupon

6 months $94 0

1 year $105 12%

Find the profitable arbitrage opportunity if the price of a one-year zero coupon bond in the market is $85. Be specific in your answer (e.g. show all cash flows).

Reference no: EM132818163

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