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?