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The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-yearmaturity
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5\% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-yearmaturity coupon bonds with coupon rates of 8% (paid annually) is 5.5%. 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.)
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