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?
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 7P
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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?
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