Question
Suppose that a one-period zero-coupon bond sells for $95, two-period zero-coupon bond sells for $91, and three-period zero-coupon bond sells for $86. All of these
Suppose that a one-period zero-coupon bond sells for $95, two-period zero-coupon bond sells for $91, and three-period zero-coupon bond sells for $86. All of these bonds have a par value of $100. A three-period bond has an annual coupon of $8, face value of $100, and price of $106. All securities are issued by the same firm.
What actions would you take to realize the arbitrage opportunity, if there's any?
You should( )1 unit of the bond and ( )units of 1-period zero, ( )units of 2-period zero, and ( )units of 3-period zero.
Tips: Fill in the blanks with proper action (buy/sell (lower case)) and the number of units. If the number of units is in decimal, round it up to 2 decimal places. If you think there is no arbitrage opportunity, then just leave everything blank.
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