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(7) In Example (8.3.3) we calculated the two-year spot rate and found r2 = 3.866088985%. Explain how there would be an arbitrage opportunity if therewas
(7) In Example (8.3.3) we calculated the two-year spot rate and found r2 = 3.866088985%. Explain how there would be an arbitrage opportunity if therewas a two-year zero-coupon bond available with a yield rate of 3.5%
Example (8.3.3):
Problem:
A two-year bond pays annual coupons of $30 and matures at $1,000. Its
price is $984. The same corporation sells a one-year $1,000 zero-coupon bond for
$975. Compute the two-year spot rate r2?
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