Question
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?
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A The strategy would cost 1 059 375 today This str...Get Instant Access to Expert-Tailored Solutions
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