Question
What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another? Give your reasons. [7 marks] b) Assume that
What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another? Give your reasons. [7 marks] b) Assume that annual interest rates are 6.45% in US and 4.25% in Canada. A financial institution (FI) can issue CDs or purchase CDs at these rates. The spot rates is $0.76/C$. i) If the forward rate is $0.79/C$, how could a bank arbitrage using a sum of $1 million? What is the spread earned? Show your workings. [8 marks] ii) At what forward rate is this arbitrage eliminated? Show your workings. [3 marks] c) On October 5th 2021, you purchase a $10,000 T-note that matures on August 23, 2029. The settlement occurs two days after the purchase. The coupon rate on the T-note is 5.695 percent and the current price quoted on the bond is 107:13 of the face value of the T-note. The last coupon payment occurred on May 23, 2021, and the next coupon payment will be paid on November 23, 2021. i) Calculate the accrued interest due to the seller from the buyer at settlement. Show your workings. [6 marks] ii) Calculate the dirty price of this transaction. Show your workings. [6 marks]
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