There is a two-year zero-coupon bond with a face value of $100. Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 9% (regardless of the time-to-maturity of the loan and risk free). Further assume that the bond is currently traded at $95.22. Please determine whether the bond i mispriced, and how you could exploit the mispricing if there is any. (Please round your calculation to the nearest 2nd decimal.) OA. Overpriced. Short-sell the bond and deposit at the bank for two years. O B. Overpriced. Borrow from the bank to buy the bond. OC. Under-priced. Borrow from the bank to buy the bond. O D. Under-priced. Short-sell the bond and deposit at the bank for two years. O E. Fairly priced at $95.22. There is no arbitrage opportunity.
There is a two-year zero-coupon bond with a face value of $100. Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 9% (regardless of the time-to-maturity of the loan and risk free). Further assume that the bond is currently traded at $95.22. Please determine whether the bond i mispriced, and how you could exploit the mispricing if there is any. (Please round your calculation to the nearest 2nd decimal.) OA. Overpriced. Short-sell the bond and deposit at the bank for two years. O B. Overpriced. Borrow from the bank to buy the bond. OC. Under-priced. Borrow from the bank to buy the bond. O D. Under-priced. Short-sell the bond and deposit at the bank for two years. O E. Fairly priced at $95.22. There is no arbitrage 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
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Transcribed Image Text:There is a two-year zero-coupon bond with a face value of $100. Suppose that there is a bank that is offering
to lend and/or borrow money at an interest rate of 9% (regardless of the time-to-maturity of the loan and risk
free). Further assume that the bond is currently traded at $95.22. Please determine whether the bond is
mispriced, and how you could exploit the mispricing if there is any. (Please round your calculation to the
nearest 2nd decimal.)
O A. Overpriced. Short-sell the bond and deposit at the bank for two years.
OB. Overpriced. Borrow from the bank to buy the bond.
OC. Under-priced. Borrow from the bank to buy the bond.
O D. Under-priced. Short-sell the bond and deposit at the bank for two years.
O E. Fairly priced at $95.22. There is no arbitrage opportunity.
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