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Consider a financial model where one can borrow and lend money at year i and up to year i +1 at the interest rate r(i, i+1). consider the float note which has notional n = $1000, maturity t = 20 years and, in addition to the notional payment at maturity, pays coupon yearly. the value of the coupon paid at time i +1 is computed at time i and is given by r(i, i+1)n. compute vo, the arbitrage-free price of the note at its issue time. remark/hint: even though this problem involves time-varying interest rates, at least one way of solving this problem relies solely on the idea of replication.
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