Assume that today is the 31st of December 2021. There are two Treasury coupon bonds traded in the market. Their face values are 1,000. The coupon payments are annual, at the end of each year. The columns of the table give the coupon rate, the maturity date, and the price (after the coupon was paid on the 31st of December). Bond Coupon Maturity Price A 14.25% 31/12/22 1089.84 B 6.25% 31/12/23 1008.44 a) Find their yield-to-maturities (YTM) b) By the law of one price, what should be a price of a Treasury bond C with a maturity 31/12/22, coupon rate 10% and face value of 1,000? c) A price of a Treasury bond D with a maturity 31/12/23, a coupon rate of 6.4% and face value of 1,000 is 1005. Is there an arbitrage opportunity? Please explain. If yes, how will you use this opportunity?
Assume that today is the 31st of December 2021. There are two Treasury coupon bonds traded in the market. Their face values are 1,000. The coupon payments are annual, at the end of each year. The columns of the table give the coupon rate, the maturity date, and the price (after the coupon was paid on the 31st of December). Bond Coupon Maturity Price A 14.25% 31/12/22 1089.84 B 6.25% 31/12/23 1008.44 a) Find their yield-to-maturities (YTM) b) By the law of one price, what should be a price of a Treasury bond C with a maturity 31/12/22, coupon rate 10% and face value of 1,000? c) A price of a Treasury bond D with a maturity 31/12/23, a coupon rate of 6.4% and face value of 1,000 is 1005. Is there an arbitrage opportunity? Please explain. If yes, how will you use this opportunity?
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
Problem 1PS
Related questions
Question
please answer all three parts within 30 minutes. make sure you answer all three parts. else negative rating for sure.
Transcribed Image Text:Assume that today is the 31st of December 2021.
There are two Treasury coupon bonds traded in the
market. Their face values are 1,000. The coupon
payments are annual, at the end of each year. The
columns of the table give the coupon rate, the
maturity date, and the price (after the coupon was
paid on the 31st of December).
Bond
Coupon
Maturity
Price
A
14.25%
31/12/22
1089.84
B
6.25%
31/12/23
1008.44
a) Find their yield-to-maturities (YTM)
b) By the law of one price, what should be a price of
a Treasury bond C with a maturity 31/12/22, coupon
rate 10% and face value of 1,000?
c) A price of a Treasury bond D with a maturity
31/12/23, a coupon rate of 6.4% and face value of
1,000 is 1005. Is there an arbitrage opportunity?
Please explain. If yes, how will you use this
opportunity?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education