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Note: Money Market yields means no discounting implied. There are 2 questions. Look down. 1. (Use money market yields for discounting) A treasury note with
Note: Money Market yields means no discounting implied. There are 2 questions. Look down. 1. (Use money market yields for discounting) A treasury note with no coupons sells today for $165, but will pay $200 in two years (its face value). If the one-year risk free interest rate is 8%, is arbitrage possible? What position should you take (long or short)? a) At what price should the note be trading? b) If there is a misprice, how could you profit? c) If the interest rate were 12%, how would your answer change? i. At what price should the note be trading? ii. How could you profit
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