Need help understanding basics of cash flow engineering


New Member
I'm studying Financial Engineering, a subject I'm completely new to. I'm using Principles of Financial Engineering 3rd Edition and trying to solve the exercises of the chapter on Cash Flow Engineering.

The first question states

You have a 4-year coupon bond that pays semiannual interest. The coupon rate is 8% and the par value is 100.
a. Can you construct a synthetic equivalent of this bond? Be explicit and show your cash flows.

Unfortunately, I don't know how to proceed with this. I'm not able to understand how the cash flows would be split. Would it be 8 separate payments and if yes, what would the payment amount be at each
ti, i=1,2,...8
and why?


Active Member
The semiannual coupon would be 1/2 of the annual coupon (8%). The payment every 6 months is then 4% times whatever the bond's face value is. So you would have 8 coupon payments plus the payment of face value at the last payment date.