a b) Create a replicate portfolio using bonds A, B, and C to replicate cashflows from bond D. Is there opportunity for arbitrage? Why or why not? Find an arbitrage strategy, replicating the cash flows from Bond D. How many of each bond will you trade? Which bonds would you buy or sell? For reference, fill out the following table: Buy or Sell Buy or Sell Buy or Sell Buy or Sell Number of bonds: Number of bonds: Number of bonds: Number of bonds: Of Bond A Of Bond B Of Bond C Of Bond D

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Problem 5
Assume all coupon rates are paid semi-annually. Use face value of $100.
Bond A: 6-month, 2% coupon bond; priced at $103
Bond B: 1-year, 4 % coupon bond: priced at $104.5
Bond C: 18 months, 10% coupon bond; priced at $109.3
Bond D: 18 months, 6% coupon bond; priced at $102
b)
c)
Create a replicate portfolio using bonds A, B, and C to replicate cashflows
from bond D.
Is there opportunity for arbitrage? Why or why not?
Find an arbitrage strategy, replicating the cash flows from Bond D. How many
of each bond will you trade? Which bonds would you buy or sell? For reference, fill out
the following table:
Buy or Sell
Buy or Sell
Buy or Sell
Buy or Sell
Number of bonds:
Number of bonds:
Number of bonds:
Number of bonds:
Of Bond A
Of Bond B
Of Bond C
Of Bond D
Transcribed Image Text:Problem 5 Assume all coupon rates are paid semi-annually. Use face value of $100. Bond A: 6-month, 2% coupon bond; priced at $103 Bond B: 1-year, 4 % coupon bond: priced at $104.5 Bond C: 18 months, 10% coupon bond; priced at $109.3 Bond D: 18 months, 6% coupon bond; priced at $102 b) c) Create a replicate portfolio using bonds A, B, and C to replicate cashflows from bond D. Is there opportunity for arbitrage? Why or why not? Find an arbitrage strategy, replicating the cash flows from Bond D. How many of each bond will you trade? Which bonds would you buy or sell? For reference, fill out the following table: Buy or Sell Buy or Sell Buy or Sell Buy or Sell Number of bonds: Number of bonds: Number of bonds: Number of bonds: Of Bond A Of Bond B Of Bond C Of Bond D
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