Question
You are looking at the Brazilian Bond Market that has the following yield curve in Table 2 (Use the following table to solve the questions).
Table: Yield Curve for Brazilian Zero-Coupon Bonds
Time to YTM
1 YEAR3.66%
2 YEAR4.20%
3 YEAR5.10%
4 YEAR6.20%
5 YEAR6.75%
a) There is a 4-year maturity bond, with a par value of 1,000 and that has a 5.5% coupon. Please calculate the price of this coupon bond.
b) If a broker is giving you a market quote for the bond at 96 (or 960 per bond); can you think of a possible arbitrage? If so, please fully detail what woul be the arbitrage and the profit.
c) In a different scenario, another broker gives you a market quote you the same previous bond but at 99 is there a possible arbitrage? If so, please fully detail what would be the arbitrage and the profit.
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Physics for Scientists and Engineers A Strategic Approach with Modern Physics
Authors: Randall D. Knight
4th edition
978-0134092508, 134092503, 133942651, 978-0133942651
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