323.11
11.You look in the paper and see that an 8% coupon bond with
annual coupons, a par value of $1000, and 3 years to maturity is
selling for $1053.46. Why is that price correct? It can only be
correct if everyone agrees that they are just indifferent between
buying the bond and re-creating the cash flows on their own. That
is, if current market interest rates are 6% and the next coupon
is due in one year, how could you use $1053.46 to exactly
replicate the cash flows from the bond? Assume you have access to
an investment instrument (like a bank account) that returns 6%
per year. Explain how you would do this (you don't actually have
to work through the numbers--just tell me in words how you would
take $1053.46 and re-create the cash flows from the bond). (4)