A 5-year zero coupon bond is stated to yield 10% continuously compounded return for the entire period (holding period return over 5 years) in market A. The same bond is quoted 2% per annum with annual compounding in Market B. Where is the bond cheaper and what is the arbitrage profit as a percentage of Par.

a. Cheaper in Market A and the arbitrage profit is 0.06734%

b. Cheaper in Market B and the arbitrage profit is 0.08934%

c. Both prices are equal; there is no arbitrage

d. Cheaper in Market A and the arbitrage profit is 0.08934%

e. Cheaper in Market B and the arbitrage profit is 0.06734%