Question 1

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

Check all that apply:

A. buy this 2-yr treasury coupon bond and short sell the equivalent package of STRIPS

B. buy the T-bill and sell the coupon bond

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

D. buy the package of STRIPS and short sell the equivalent 2-yr treasury coupon bond

E. buy this 2-yr treasury coupon bond and sell each of its cash flows as Treasury STRIPS

Question 2

Fixed-income arbitrage is to seek mispriced Treasury coupon bonds, through a set of linear equations in the following framework:

P1=C1P0,1+C1P0,2+...+(C1+F)P0,T

P2=C2P0,1+C2P0,2+...+(C2+F)P0,T

......

Pn=CnP0,1+CnP0,2+...+(Cn+F)P0,T

Part 1

What areP1P1,P2P2, ... ,PnPn?

A. fair prices of treasury coupon bonds at the time

B. fair prices of the STRIPS

C. current prices of treasury STRIPS observed in the market

D. current prices of treasury coupon bonds observed in the market

I CHOSEN B. FAIR PRICES OF THE STRIPS AND IT WAS WRONG

Part2

What doP0,1,P0,2, ... ,P0,TP0,Tdenote? Select the most accurate one

A. current market prices of all treasury coupon bonds standardized for $1 face value

B. 1-year STRIPS, 2-year STRIPS, ... T-year STRIPS

C. current market prices of all STRIPS standardized for $1 face value

D. fair prices of treasury coupon bonds standardized for $1 face value

I CHOSEN D. FAIR PRICES OF TREASURY COUPON BONDS STANDARDIZED FOR $1 FACE VALUE AND IT WAS WRONG

Part3

About the framework of linear equations, which statements are true?

Check all that apply:

A. Because there are over 200 Treasury Notes and Bonds trading everyday, but only 30~60 STRIPS, not all equations can hold

B. Not all equations can hold, because the market is not always efficient

C. On the left-hand side of the equations are fair value of the coupon bonds, and right-hand side are market value of the coupon bonds

D. Because the number of equationn is a lot greater thanTT, not allnequations can hold

E. Not all equations can hold, because market anomaly and market disruption happens from time to time

F. Because the total number of Treasury Notes and Bonds is a lot greater than total number of STRIPS, not all equations can hold

I CHECKED A. AND D. AND IT WAS WRONG

QUESTION 3

A Treasury coupon bond has 5-year to maturity with a face value of $1,000 and a current market price of $946.58. The bonds pay coupon annually and have a yield to maturity of 4 percent. Jake, a bond speculator, just purchased the bond at the current market price.

Part1

What is the coupon rate?

I tried solving this, my answer was 20% and it was wrong

Part2

Jake is not happy with the 4% YTM, he wants to earn higher rate of return. He anticipates to hold the bond for only one year and earn 6% in that year. His strategy is to cash in the first coupon at the end of the first year and then sell the bond right away. What market price should he predict in one year's time?

MY ANSWER WAS $910.91, IT WAS INCORRECT

Part3

What will be the YTM in one year if his prediction is accurate?

MY ANSWER WAS 3.33% AND IT WAS INCORRECT.

Part4

What will be the market price in one year if the YTM stays at 4%?

ALL INFORMATION ARE COPIED HERE FROM ACCEPI WEBSITE, THERE WAS NO OTHER MATERIALS OR INFO.

PLEASE WRITE OUT THE STEPS BY STEPS AND EXPLANATION ON HOW TO SOLVE EACH PROBLEM. THANK YOU.