Answer: USD 101.8

The question is about finding the price of a 1-year Treasury bond that pays a coupon of 6% semi-annually using a replication approach. The replication approach involves creating a portfolio consisting of a 1-year zero-coupon bond priced at USD 98 and a 1-year bond paying an 8% coupon semi-annually priced at USD 103. The goal is to match the cash flows of the 6% coupon bond with the cash flows from the replicating portfolio. The cash flow equations at different times are set up as follows: - At time t=0, the initial investment in the replicating portfolio should equal the price of the bond we want to find (F3). - At time t=0.5 (midway through the year), the 8% coupon bond pays a semi-annual coupon of USD 4, and we need to ensure the replicating portfolio also has a cash flow of USD 3 at this time. - At time t=1.0 (end of the year), the 6% coupon bond matures and pays back its principal of USD 100, and the replicating portfolio should also return a total of USD 103. Using these equations, we solve for the weight factors F1 and F2, which represent the proportions of the zero-coupon bond and the 8% coupon bond in the replicating portfolio, respectively. From Equation (2), we find F2 = 3/4 = 0.75. Substituting F2 into Equation (3), we solve for F1 and find F1 = 0.25. Then, we plug the values of F1 and F2 into Equation (1) to determine the price of the bond (F3). The calculation results in F3 = 98*0.25 + 103*0.75, which equals USD 101.75. However, since the options provided are not in decimals, we round to the nearest option, which is USD 101.8. This corresponds to option C. The other options are incorrect based on different assumptions or calculations, such as switching the weight factors, using the yield-to-maturity in the pricing, or ignoring one of the bonds in the replication process.

Author: LeetQuiz Editorial Team