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Fixed Income Arbitrage is to find misoricing of treasury Coupon bonds through systemen of equations > Mof unknowns. Suppose there are only treasury coupon bonds on the man pon bonds through wystem of linear equations where Bond A: 2-year 2% treasury coupon bond, trading at $9370 Bond B: 2-year 3% treasury coupon bond, trading at $955.5 Bond C: 2-year 4.5% treasury coupon bond, trading at $9740 All 3 treasury coupon bonds pay annual coupon Let Po, and Po be the two unknowns, where pe the price o be the two unknowns, where Pa, denotes the price today of a 1-year STRIPS, and today of a 2-year STRIPS, Face value of STRIPS is $1. Since each coupon bond is essentially a package of STRIPS, write the 3 equation 2-unknown Syste 2) Usually how many pairs of solutions can you solve for the system in (1) Focusing on ONLY Bond A and Bonds will this 2 equation 2 unknown witem have solutions? Solve them if yes Suppose your solution in (3) are indeed the STRIPS prices today. what can you say about arbitrage profit in any of three coupon bonds, in which one(s), how much? 7. In your brokerage account, you decide to sell short 200 shares of Facebook stock, whose current price is $120. The account has initial margin requirement of 55% and maintenance margin requirement of 35%. 1) Initially, you put in some cash to just meet the initial margin requirement, what's the amount you put in? 2) One week later, FB stock price goes up 20% Show that you are indeed getting a margin call 3) You take no action on the margin call, then what will the broker do? Round your answer to integer number of shares Set up a balance sheet chart each for 1), 2) and 3) to assist your answers. 8. Suppose CAPM holds true for the following two stocks, of which you collect the historical return and risk: Security Average (expected) monthly return Standard deviation of returns GOOG 2.0% 9.1% TIF 1.2% 10.2% 1) Complete the following statement: Higher risk-higher return principle more accurately means higher , higher expected (average) return. 2) Then explain clearly if these two stocks are consistent with the principle or not. 3) Which stock must have a greater unsystematic risk, explain why? Page