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Compute the value of the firm inverse floating-rate bond

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    Assignment ID: FG133134451

    Question – Firm X has an option-free fixed-rate bond: 16 years to maturity and a 9% coupon. The firm has a floating-rate bond and an inverse floating-rate bond. Both bonds have 16 years to maturity. The floating-rate bond has a coupon rate of [L6+2%] and the inverse floating-rate bond has a coupon rate of [7% – L6], where L6 is the six-month LIBOR rate. If the cost of debt of the firm is 6% on a fixed-rate basis and [L6+2%] on a floating-rate basis, compute the value of the firm’s inverse floating-rate bond. All three bonds make semiannual coupon payments.

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