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-year-maturity coupon bonds with coupon rates of 11% (paid annually) is 7.7%.

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: ______ each bond