Suppose you observe a one year zero coupon bond with par value $1000 is selling for $900, and a two year zero coupon bond with p
ar value $1000 is selling for $850. In order for there to be no arbitrage opportunity, what must be the price of a two year, 10% coupon bond with par value $1000?
1 answer:
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Answer:
13%
Explanation:
The appropriate formula to use is as shown below:
Standard Deviation =
Where ∑ is the summation symbol,
f is the frequency (in this sample, the probability expressed in decimal),
x is the expected return,
y is the mean return.
The formula for y, the mean return, is as follows:
y = .
All computations are attached.
From the computation,
the mean return = 8.876%
the standard deviation of returns = 12.7377% = 13%
