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Suppose you would like to create a two-year synthetic zero-coupon bond. Assume the following is true:...

Suppose you would like to create a two-year synthetic zero-coupon bond. Assume the

following is true: One-year zero-coupon bonds are trading for $0.93 per dollar of face value

and two-year 7% coupon bonds (with annual payments) are selling at $983.30 (face =

$1,000).

a) What are the cash flows from the two-year coupon bond?

b) What is the one-year spot rate?

c) What must be the two-year spot rate?

d) Assume you can purchase the two-year coupon bond and unbundle the two cash flows

and sell them. What price would you receive for each cash flow?

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