Suppose an arbitrageur for a hedge fund finds two identical bonds trading at different YTMs: Bond A,
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Suppose an arbitrageur for a hedge fund finds two identical bonds trading at different YTMs: Bond A, an AA-rated, 10-year, option-free, 10% annual coupon bond trading at par, and Bond B, an AA-rated, 10-year, option-free, 10% annual coupon bond trading to yield 10.25%. What are the prices of each bond? What swap strategy would you recommend to the arbitrageur? What is the risk in this strategy?
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