There is a table above the questions

• Zero coupon, 1 Maturity, 0 coupon, 96.32 Price, 3.82% YTM
• Zero coupon 2 maturity, 0 coupon, 91.40 price 4.60% YTM
• Zero coupon 3 maturity, 0 coupon,, 89.11 price, 3.92% YTM

Questions

1. Annual - Pay Coupon, Maturity = 2, coupon = 5%, what is the price?
2. Suppose that you hold this arbitrage position until maturity in two years. What will be your

profit in dollars? What is the annual return as a percentage of the value of the long side of the

position? If the margin requirement is 10% for all long and short positions, what is the initial

margin requirement in dollars? What is the annual return as a percentage of this initial margin requirement?

3

Suppose that, after one year, the yield to maturity on all bonds is 5%. What is the profit or loss

in dollars at this time? What is the annual return as a percentage of the initial margin

requirement?

4

Suppose that the yield to maturity on all bonds becomes 5% already 1 month after you put on

the trade. What is the profit or loss in dollars at this time? What is the annual return as a

percentage of the initial margin requirement?