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 14% (paid annually) is 7.9%.

a.	What arbitrage opportunity is available for an investment banking firm? (Omit the "$" sign in your response.)

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. Omit the "$" sign in your response.)

Profit

$

each bond