Citron purchased $7.6 billion of 5-year treasury bonds using the funds contributed (the yield to maturity of 5-year bonds were y=5% at that time with semi-annual coupons). He then used the $7.6 billion fund as collateral to purchase an additional $13 billion dollars of 5-year treasury bonds from Citibank. The additional treasury bonds were financed via a repo rate of 3% from JP Morgan for a period of 1 year. Hence, he believed he would make a 2% spread on this trade.

a) Show the trades done at t=0 (start of 1993), assuming these trades are done all at t=0 and the bonds are purchased at par ($100 per $100 face value). (Purchase of bonds with $7.6 billion and then the additional purchase from Citibank with financing from JP Morgan)

b) Show the trades done at t=1 (start of 1994) when the trades are unwound (after one year). Suppose the $20.6 billion on 5-year bonds are sold at t=1, and the yield to maturity on treasury bonds remains at 5% at t=1.

c) Compute the total profits based on trades at t=1. Compute the $ profit and the percentage profit on the $7.6 investment at t=0 assuming that all bonds are sold at t=1.