Question
A single Treasury bond (symbol: 1YCP) pays $5.00 in six months and $105.00 in twelve months. A single six-month Treasury bill (symbol: TB6M) pays $100.00
A single Treasury bond (symbol: 1YCP) pays $5.00 in six months and $105.00 in twelve months. A single six-month Treasury bill (symbol: TB6M) pays $100.00 in six months. A single twelve-month Treasury bill (symbol: TB12M) pays $100.00 in twelve months. If you bought 0.05 six-month Treasury bills and 1.05 twelve-month Treasury bills, you would receive $5.00 in six months (0.05 x $100.00) and $105 in twelve months (1.05 x $100.00). This is exactly the payoff from a single Treasury bond. Thus, by the law of one price, the price of a single Treasury bond should equal the price of 0.05 six-month Treasury bills plus the price of 1.05 twelve-month Treasury bills. If the law of one price does not hold, then an arbitrage opportunity may exist.
What Are the other combinations that could be used to find an arbitrage opportunity?
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