I am being asked to create a synthetic callable bond using non-callable bonds and STRIPs. The callable bond had a maturity date of 2005 and was first callable in 2000. It is an 8.25% coupon bond.
Supposedly I can create this callable bond synthetically by combining non-callable bonds maturing in 2005 with zero-coupon Treasuries (STRIPS) also maturing in 2005. According to my professor I should be able to match the cash flows of the callable bond by combining the non-callable and the STRIPS at fractions summing to one.
I am completely missing something in this problem.
Any thoughts are much appreciated.