Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8% (regardless of the time-to-maturity of the loan). Further suppose that there is a two-year coupon bond trading with a face value of $100 and a coupon rate of 5% trading in the market. Price the bond using an explicit no-arbitrage argument. a) Suppose that the bond in the previous question is actually trading for $92. Show how you could exploit the mispricing to make an arbitrage profit.( Question)
Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8% (regardless of the time-to-maturity of the loan). Further suppose that there is a two-year coupon bond trading with a face value of $100 and a coupon rate of 5% trading in the market. Price the bond using an explicit no-arbitrage argument. a) Suppose that the bond in the previous question is actually trading for $92. Show how you could exploit the mispricing to make an arbitrage profit.( Question)
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
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Suppose that there is a bank that is offering to lend and/or borrow money at
an interest rate of 8% (regardless of the time-to-maturity of the loan).
Further suppose that there is a two-year coupon bond trading with a face
value of $100 and a coupon rate of 5% trading in the market. Price the bond
using an explicit no-arbitrage argument.
a) Suppose that the bond in the previous question is actually trading for $92.
Show how you could exploit the mispricing to make an arbitrage profit.( Question)
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