Question
7. Suppose you observe a 4-year Treasury bond with a 3% coupon (paid annually) and a $1,000 par value. What is the arbitrage-free price of
7. Suppose you observe a 4-year Treasury bond with a 3% coupon (paid annually) and a $1,000 par value. What is the arbitrage-free price of this bond?
Suppose that the bond in question #7 has a yield-to-maturity of 5.50%. If you were to exploit this mispricing opportunity, what would your arbitrage profit be?
Assume that you can invest any amount in STRIPS and that 1-4-year STRIPS are correctly priced based on the spot rates that you have calculated. In order to benefit from the arbitrage opportunity in question #8, how much should you invest in a 1-year STRIP?
How much should you invest in 2-year strip?
How much should you invest in a 3-year strip?
How much should you invest in a 4-year strip?
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Finance And Sustainability
Authors: William Sun, Celine Louche, Roland Perez
1st Edition
1780520921, 978-1780520926
