you have already solved this question but i just want to now how did you get Yield to maturity = YTM = 3.1%

Question Assume that we know the following A bond will make a risk-free payment of 1000 SEK in one year's time. The current price of the bond is 970 SEK. You can also put your money into a bank account which we also assume is risk-free. The bank account gives you an interest rate of 1.4 % over the year and this is also the rate at which you can borrow money. What would be the arbitrage strategy, and how much do we gain pursuing it? (The alternatives display numbers rounded to one decimal point.) a. We borrow 986.2 SEK from the bank and buy the bond for 970 SEK. This gives us 16.2 SEK today. b. Invest 986.2 SEK in the bank account today and receive 1000 SEK in one year. c. Buy the bond today for 970 and receive 1000 SEK in one year. d. We go short in the bond and invest 970 SEK in the bank account. This gives us 16.4 SEK today. e. There is no possibility for arbitrage. Expert Answer Anonymous answered this 65 answers Calculation of Yield to maturity on bond: Current market price = CMP = 970 SEK Maturity Value = MV = 1000 SEK Number of period = 1 years Yield to maturity = YTM = 3.1% (i.e., interest earned on bond at 1 year time) YTM + 1 = MV / CMP YTM + 1 = 1000/970 YTM +1 = 1.031 YTM = 1.031 - 1 YTM = 0.031 or 3.1 % Calculation of Arbitrage: Bank deposit and borrowing rate at 1 year time = 1.4 % Bond YTM = 3.1% Bond YTM > Bank deposit / Borrowing rate Strategy: Borrow money from Bank @ 1.4% for 1 year equivalent to bond CMP 970 SEK and invest in bond: Repayable amount = 970 (1 + 0.014) = 983.6 SEK Matured value of Bond after 1 year will be = 1000 SEK Arbitrage profit = 1000-983.6 = 16.4 SEK