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2. Consider the following data on risk-free government bonds that pay fixed coupons and have no built-in call/put features: (A) Find an arbitrage trade that
2. Consider the following data on risk-free government bonds that pay fixed coupons and have no built-in call/put features: (A) Find an arbitrage trade that makes a profit at t=0 without risking any of your own capital. (B) Find an arbitrage trade that makes a profit at t=30 without risking any of your owncapital. (C) Is there a graphical way in which you can determine which bonds are overvalued and which bonds are undervalued? (D) What do you expect will happen to the market prices of these bonds as a result of the arbitrage trades you found in parts (A) and (B) ? 2. Consider the following data on risk-free government bonds that pay fixed coupons and have no built-in call/put features: (A) Find an arbitrage trade that makes a profit at t=0 without risking any of your own capital. (B) Find an arbitrage trade that makes a profit at t=30 without risking any of your owncapital. (C) Is there a graphical way in which you can determine which bonds are overvalued and which bonds are undervalued? (D) What do you expect will happen to the market prices of these bonds as a result of the arbitrage trades you found in parts (A) and (B)
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