The yield to maturity (YTM) on 1-year zero-coupon bonds is 4%

jagguarpaw January 11, 2017 0 Comments

Question: The yield to maturity (YTM) on 1-year zero-coupon…

The yield to maturity (YTM) on 1-year zero-coupon bonds is 4% and the YTM on 2-year zero’s is 6%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 14% (paid annually) is 5.0%.

  1. What arbitrage opportunity is available for an investment banking firm? (Omit the “$” sign in your response.)

The arbitrage strategy is to buy zero’s with face values of $—— and $———, and respective maturities of one year and two years.

  1. What is the profit on the activity? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Profit   $              each bond