Answer:
3.57% per Annum or 0.0357
Explanation:
Recall that,
By Taking a long position in two of the 4% coupon bonds and a short position in one of the 8% coupon bonds it results in the following
The Year 0: 90- 2 x 80 = -70
The Year 10: 200- 100 = 100
Since both coupons cancel each other.
In 10 years time a $100 will be the same to $70 today.
The 10-year rate, R, (10-year-rate) is given as,
The rate is 1/10 in 100/70 =0.0357 or 3.57% per year.
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