- An investor gathered the following information on three zero-coupon bonds: 1-year, $600 par, zero-coupon bond valued at $571 2-year, $600 par, zero-coupon bond valued at $544 3-year, $10,600 par, zero-coupon bond valued at $8,901 Given the above information, how much should an investor pay for a $10,000 par, 3-year, 6 percent, annual-pay coupon bond? A)$10,000. B)$10,600. C)$10,016. D)Cannot be determined by the information provided.
571+544+8901 = 10,106 C) Coupon bond can be stripped into a sequence of zero-coupon bonds.
D. without knowing the Yield for each zero coupon bond you can’t really strip anything. According to yoru logic seems like you’d still choose C as yoru answer if the coupon was 20% also.
Well done SSS, The answer is C. The cash flows of the zero-coupon bonds combined to make a portfolio would be similar to cash flows from the 3 yr bond that is asked about. Pepp - the discount rate is factored in the present value of the zero-coupon bonds.
I never claimed I could pass this exam.
ofcourse not, that would be an ethical violation - misrepresentation.
nahsuar Wrote: ------------------------------------------------------- > 1. An investor gathered the following information > on three zero-coupon bonds: > > 1-year, $600 par, zero-coupon bond valued at > $571 > 2-year, $600 par, zero-coupon bond valued at > $544 > 3-year, $10,600 par, zero-coupon bond valued > at $8,901 > > Given the above information, how much should an > investor pay for a $10,000 par, 3-year, 6 percent, > annual-pay coupon bond? > > A)$10,000. > B)$10,600. > C)$10,016. > D)Cannot be determined by the information > provided. IF IT WAS NOT 10,016, THERE WOULD BE NA ARBITRAGE SITUATION HERE