A bond that matures two and a half years from now has a par value of...
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A bond that matures two and a half years from now has a par value of $1 million, a 5% per annum coupon and pays interest once a year. Its current yield-to-maturity is 4.30% per annum. Zero-coupon bonds are available for maturities from six months to three years. The current zero rates, expressed as Effective Annual Rates, are shown in the following table. Term (years) 0.5 1.0 1.5 2.0 2.5 3.0 Zero rate pa 4.23% 4.46% 4.59% 4.60% 4.62% 4.64% You are able to buy and sell as many zero-coupon bonds as you wish and you may do so in fractions of a bond. Design an arbitrage that will produce a net cash inflow today and zero net cash flows in the future. Be careful to state exactly which bond(s) you will buy or sell today and in what amount(s). How much is your net cash inflow today? Show your calculations. marks A bond that matures two and a half years from now has a par value of $1 million, a 5% per annum coupon and pays interest once a year. Its current yield-to-maturity is 4.30% per annum. Zero-coupon bonds are available for maturities from six months to three years. The current zero rates, expressed as Effective Annual Rates, are shown in the following table. Term (years) 0.5 1.0 1.5 2.0 2.5 3.0 Zero rate pa 4.23% 4.46% 4.59% 4.60% 4.62% 4.64% You are able to buy and sell as many zero-coupon bonds as you wish and you may do so in fractions of a bond. Design an arbitrage that will produce a net cash inflow today and zero net cash flows in the future. Be careful to state exactly which bond(s) you will buy or sell today and in what amount(s). How much is your net cash inflow today? Show your calculations. marks
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Answer rating: 100% (QA)
To design an arbitrage we need to find a combination of zerocoupon bonds that replicate the cash flows of the coupon bond but with a lower cost The co... View the full answer
Related Book For
Introduction to Governmental and Not for Profit Accounting
ISBN: 978-0132776011
7th edition
Authors: Martin Ives, Terry K. Patton, Suesan R. Patton
Posted Date:
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