The yield to maturity (YTM) on 1-year zero-coupon bonds is 5%, and the YTM on 2-year zeros

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The yield to maturity (YTM) on 1-year zero-coupon bonds is 5%, and the YTM on 2-year zeros is 6%. The YTM on 2-year-maturity coupon bonds with coupon rates of 12% (paid annually) is 5.8%.

a. What arbitrage opportunity is available for an investment banking firm?

b. What is the profit on the activity? P-639

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