Intro

A 5% treasury coupon bond has 2 years left to maturity, it pays annual coupon, and is trading at $980 today. You observe the following market data as of today:

1-year T-bill trading at $960,

2-year treasury spot rater0,2 = 4%.

All bonds have face value of $1,000.

Part1

Using the arbitrage-free approach, what is the fair market value of this 2-yr coupon bond?

Part2

Is this 2-yr treasury coupon bond fairly priced?

A) not enough information to determine

B) it's underpriced

C) it's fairly priced

D) it's overpriced

Part3

How much arbitrage profit can you make if there is any?

Part4

What are your strategies to earn arbitrage profit if any? select ALL applicable strategies.

Check all that apply:

buy the T-bill and sell the coupon bond

buy this 2-yr treasury coupon bond and shortsell the equivalent package of STRIPS

buy the package of STRIPS and shortsell the equivalent 2-yr treasury coupon bond

buy the package of STRIPS and reconstitute them into a 2-yr treasury coupon bond to sell it

buy this 2-yr treasury coupon bond and sell each of its cashflows as Treasury STRIPS