The yield to maturity $($YTM$)$ on $1-$year zero$-$coupon bonds is $7\%$ and the YTM on $2-$year zeros is $8\%.$ The yield to maturity on $2-$yearmaturity coupon bonds with coupon rates of $11\%($paid annually$)$ is $7\mathrm{.}7\%.$

a$.$ What arbitrage opportunity is available for an investment banking firm?

The arbitrage strategy is to buy zeros with face values of and $,$ and respective maturities of one year and two years.

b$.$ What is the profit on the activity? $($Do not round intermediate calculations. Round your answer to $2$ decimal places.$)$

Profit

$

$8\mathrm{.}36$ each bond