In class we discussed the concept of riding the yield curve. Answer the following questions given the Treasury note quotes below. $($For our purposes assume that we are exactly $6$ months between coupons. Also assume that there is no interest income on reinvested coupons.$)$

Date Coupon Ask Price Ask Yield

December $20227\mathrm{.}5\%10155\mathrm{.}90\%$

December $20237\mathrm{.}5\%10176\mathrm{.}60\%$

$1.$Given these quotes and assuming that the yield curve will remain constant, what, if any, profits can be made by using this strategy for a one year holding period?

A$.$$$59$

B$.$$$0$

C$.$$$73\mathrm{.}32$

D$.$$$13\mathrm{.}32$

$2.$How many basis points, if any, can you pick$-$up by using this strategy?

A$\mathrm{.}70$ basis points

B$\mathrm{.}0$ basis points

C$\mathrm{.}131$ basis points

D$\mathrm{.}61$ basis points

$3.$Removing the assumption of the constant yield curve, what is the lowest possible selling price for the $2023(2$ year$)$ note, after one year, for this strategy to be profitable?

A$.$$$1000$

B$.$$$1002$

C$.$$$1009$

D$.$$$1001$

$4.$

When performing such a strategy it is important to be aware of the potential risk of your interest rate predictions being wrong. By how much would the yield on the $2023$ bond have to increase in one year for your profits to be eliminated? $[$Hint: you can do this by solving for the yield to maturity given the price found in the previous question and using n $=2$ periods.$]$

Group of answer choices

A$\mathrm{.}0$ basis points

B$\mathrm{.}90$ basis points

C$\mathrm{.}69$ basis points

D$\mathrm{.}79$ basis points