Question
Hi, I have a hard time understanding the solution. Is it that I buy bond B, because it has the same price but a higher
Hi, I have a hard time understanding the solution. Is it that I buy bond B, because it has the same price but a higher coupon rate? And that the opportunity will not last long. As people will start selling A and buying B, thus the price of A will decrease and the price of b will increase. And what would be the price of the bonds than?
Suppose there are two risk free one-year bonds, A and B, that you discover. Bond A has a current price of $1,000. At the end of the year it will pay a coupon of $50 and principal of $1,000. It therefore yields 5%. Bond B also has a current price of $1,000. At the end of the year it will pay a coupon of $60 and principal of $1,000. It therefore yields 6%. How can you make money? Will this opportunity persist?
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