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There are two coupon bonds with five years maturity. Their par values are $1,000 and $500, respectively. The two bonds currently trade at $900 and
There are two coupon bonds with five years maturity. Their par values are $1,000 and $500, respectively. The two bonds currently trade at $900 and $400, respectively. Assume there is no risk of default and assume one can short bonds.
In this example, the law of one price has been violated. Please construct a detailed arbitrage strategy to take advantage of the violation.
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