Based on Exhibit 4, the arbitrage-free value of the Ri bond is closest to:
A) €814.
B) €1,056.
C) €1,108.

Question

Quizplus · Accepted Answer

The arbitrage-free value of the Ri bond can be calculated by discounting the bond's cash flows at the corresponding spot rates. Using the spot rates from Exhibit 4 and discounting the cash flows of the Ri bond, we get:

€20 / (1+0.04)^1 = €19.23
€20 / (1+0.05)^2 = €16.99
€1,020 / (1+0.06)^3 = €832.23

The sum of these discounted cash flows is €1,068.45. However, we also need to add the accrued interest of €39.23 to get the total arbitrage-free value, which gives us €1,107.68. Rounded to the nearest euro, the closest answer is C) €1,108.

Based on Exhibit 4, the Arbitrage-Free Value of the Ri