Question
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
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 |
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