You are given the following information about the yield curve: the 1-, and 2-year yields are y1 = 4.5% and y2 = 5.5%, respectively. A 2-year annual 5% coupon bond with a face value of $1,000 is currently selling for $1,000. Assume the first coupon will not be paid until one year from now. Is there an arbitrage opportunity and, if so, how would you explolt it (assume we cannot trade in fractions of a penny)? A. There is no arbitrage opportunity B. Yes: Buy the bond and fund this by shorting a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond C. Yes: Buy the bond and fund this by shorting a $47.85 face value 1-year discount bond and a $943.38 face value 2-year discount bond D. Yes: Short the bond and buy a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond E. Yes: Short the bond and buy a $47.85 face value 1-year discount bond and a $943.38 face value 2-year discount bond

You are given the following information about the yield curve: the 1-, and 2-year yields are y1 = 4.5% and y2 = 5.5%, respectively. A 2-year annual 5% coupon bond with a face value of $1,000 is currently selling for $1,000. Assume the first coupon will not be paid until one year from now. Is there an arbitrage opportunity and, if so, how would you explolt it (assume we cannot trade in fractions of a penny)? A. There is no arbitrage opportunity B. Yes: Buy the bond and fund this by shorting a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond C. Yes: Buy the bond and fund this by shorting a $47.85 face value 1-year discount bond and a $943.38 face value 2-year discount bond D. Yes: Short the bond and buy a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond E. Yes: Short the bond and buy a $47.85 face value 1-year discount bond and a $943.38 face value 2-year discount bond

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...

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