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The market wide discount rates are known to be 0.96 for 1-year and 0.90 for 2- years. You observe that a two-year zero-coupon bond with
The market wide discount rates are known to be 0.96 for 1-year and 0.90 for 2- years. You observe that a two-year zero-coupon bond with a face value of 250 trades at 230 and a 1-year zero coupon bond with a face value of 150 trades at 142. What trading strategy do you implement (there is no need to calculate the number or values of the bonds traded) and what do you expect the outcome of this strategy to be if it is mimicked by other institutions in the bond market?
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