The yield to maturity (YTM) on 1-year zero-coupon bonds is 6% and the YTM on 2-year zeros is 7%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 9% (paid annually) is 6.5%.   a. What arbitrage opportunity is available for an investment banking firm?   The arbitrage strategy is to buy zeros with face values of $___  and $____  , and respective maturities of one year and two years.   b. What is the profit on the activity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question

The yield to maturity (YTM) on 1-year zero-coupon bonds is 6% and the YTM on 2-year zeros is 7%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 9% (paid annually) is 6.5%.

 

a. What arbitrage opportunity is available for an investment banking firm?

 

The arbitrage strategy is to buy zeros with face values of $___  and $____  , and respective maturities of one year and two years.

 

b. What is the profit on the activity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

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