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Problem 5 The yield to maturity (YTM) on 1-year zero-coupon bond is 5% and the YTM on 2-year zeros is 6%. The yield to maturity

Problem 5

The yield to maturity (YTM) on 1-year zero-coupon bond is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-year maturity coupon bonds with coupon rates of 12% (paid annually) is 5.8%. What arbitrage opportunity is available for a xed income trader? What is the prot of this activity? Please explain your strategy and your trading activity.

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