4.[10 points] There are four bonds, A, B, C, D, with the following cash flows (dates...
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4.[10 points] There are four bonds, A, B, C, D, with the following cash flows (dates in years, entries in $): Date 0 1 2 3 A -134 150 10 30 B -0.8 1 0 0 C -0.7 0 1 0 D 0 0 -0.5 1 (a) (4pts) Construct an arbitrage in this market. (b) (1pt) To eliminate the arbitrage opportunity, what should be the price for A? (c) (5pts) To eliminate the arbitrage opportunity, what should be the price for D? 4.[10 points] There are four bonds, A, B, C, D, with the following cash flows (dates in years, entries in $): Date 0 1 2 3 A -134 150 10 30 B -0.8 1 0 0 C -0.7 0 1 0 D 0 0 -0.5 1 (a) (4pts) Construct an arbitrage in this market. (b) (1pt) To eliminate the arbitrage opportunity, what should be the price for A? (c) (5pts) To eliminate the arbitrage opportunity, what should be the price for D?
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Answer a To construct an arbitrage in this market we need to find a combination of bonds that guaran... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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