Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following STRIP Bonds, the settlement date is 12/10/2022: Maturity STRIP Price YTM/spot rate 6/15/2023 96 8.11% 12/15/2023 92 8.57% 6/15/2024 89 8.00% 12/15/2024

Consider the following STRIP Bonds, the settlement date is 12/10/2022:

Maturity

STRIP Price

YTM/spot rate

6/15/2023

96

8.11%

12/15/2023

92

8.57%

6/15/2024

89

8.00%

12/15/2024

85

8.40%

6/15/2025

81

8.74%

12/15/2025

75

10.02%

6/15/2026

70

10.68%

12/15/2026

68

10.08%

6/15/2027

65

10.01%

12/15/2027

63

9.65%

6/15/2028

58

10.38%

12/15/2028

55

10.45%

A. An insurance company projects claims of $250m, $300m, and $500m, 3, 4, and 5 years later. If the company wants to match the projected liabilities with STRIPs, how much would the strategy cost today? Will the strategy protect the company from cash-flow risk?

B. Using the above spot rates, what is the price of a 5-year, 4.5% bond? Assume semiannual interest payments. What is the YTM of the 5-year T-bond?

C. If the 5-year T-bond is selling for 110, is there an arbitrage opportunity?

D. How much is the arbitrage profit? What are the required trades to exploit the arbitrage opportunity?

Step by Step Solution

3.35 Rating (155 Votes )

There are 3 Steps involved in it

Step: 1

A The strategy would cost 1 059 375 today This str... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Stats Data And Models

Authors: Richard D. De Veaux, Paul D. Velleman, David E. Bock

4th Edition

321986490, 978-0321989970, 032198997X, 978-0321986498

More Books

Students also viewed these Finance questions

Question

What is the cerebrum?

Answered: 1 week ago