8) a. Suppose a 7.6% semi-annual coupon 20-year Treasury issue with a par value of $100 issue is priced in the market based on the on-the-run 20-year Treasury yield. Assume further that this yield is 6.20%, so that each cash flow is discounted at 6.20% divided by 2. What is the market price of the Treasury issue based on this assumption?

b. Suppose also that the price of the same Treasury issue would be $108.462 if it is calculated based on the prevailing Treasury spot rate curve. What action would a dealer take and what would the arbitrage profit be? Can this situation persist in the long run?