For this question, you are asked to evaluate the LOOP benchmark and then explore the profitable...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
For this question, you are asked to evaluate the LOOP benchmark and then explore the profitable investment opportunity when it does not hold exactly in the context of fixed income securities, i.e., bonds. 1 This question centers on a 6% T-Note with maturity 03/1/24, and 3 Zero Coupon Bonds (ZCBS). The ZCB maturities and prices (in dollars) are provided in the following table: Today Part A [5 points] ZCB Maturity 3/1/23 9/1/23 3/1/24 1/27/23 ZCB Price $99.70 $97.00 $94.00 Note: assume a perfectly liquid market, i.e., bid price = ask price. Note #2: note that I'm providing ZCB prices (in dollars), so you don't need to convert the discount to prices like in Q2. Write out the cash flows of the 6% T-Note maturing on 03/01/24. I.e., for every date that the T- Note makes a payout, record the date and, next to it, record the dollar amount that the T-Note pays out. Part B [5 points] For each date when the 6% T-Note above makes a payment, indicate how many T-Bills and of what maturity do you need to replicate that particular cash flow. Hint: i.e., figure out how to replicate individual cash flows of the T-Note. Part C [5 points] Suppose the Law of One Price holds. Based on the ZCB prices in the table above, what should be the price of the 6% T-Note? Part D [15 points] Suppose the price of the T-Note is $102, i.e., not the same obtained in Part C. This implies that the market is at an imbalance and the Law of One Price does not hold. Is there a profitable investment opportunity that does not carry over any risk that involves trading the T-Note, and the ZCBs? Hint: sell expensive, buy cheap. Make sure the long-short strategy is nothing but positive cash flows. For this question, you are asked to evaluate the LOOP benchmark and then explore the profitable investment opportunity when it does not hold exactly in the context of fixed income securities, i.e., bonds. 1 This question centers on a 6% T-Note with maturity 03/1/24, and 3 Zero Coupon Bonds (ZCBS). The ZCB maturities and prices (in dollars) are provided in the following table: Today Part A [5 points] ZCB Maturity 3/1/23 9/1/23 3/1/24 1/27/23 ZCB Price $99.70 $97.00 $94.00 Note: assume a perfectly liquid market, i.e., bid price = ask price. Note #2: note that I'm providing ZCB prices (in dollars), so you don't need to convert the discount to prices like in Q2. Write out the cash flows of the 6% T-Note maturing on 03/01/24. I.e., for every date that the T- Note makes a payout, record the date and, next to it, record the dollar amount that the T-Note pays out. Part B [5 points] For each date when the 6% T-Note above makes a payment, indicate how many T-Bills and of what maturity do you need to replicate that particular cash flow. Hint: i.e., figure out how to replicate individual cash flows of the T-Note. Part C [5 points] Suppose the Law of One Price holds. Based on the ZCB prices in the table above, what should be the price of the 6% T-Note? Part D [15 points] Suppose the price of the T-Note is $102, i.e., not the same obtained in Part C. This implies that the market is at an imbalance and the Law of One Price does not hold. Is there a profitable investment opportunity that does not carry over any risk that involves trading the T-Note, and the ZCBs? Hint: sell expensive, buy cheap. Make sure the long-short strategy is nothing but positive cash flows.
Expert Answer:
Answer rating: 100% (QA)
Part A The cash flows of the 6 TNote maturing on 030124 are as follows 030123 No cash flow coupon payment is made annually 030124 Principal payment of ... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
You are asked to evaluate the performance of two classification models, M1 and M2. The test set you have chosen contains 26 binary attributes, labeled as A through Z. Table 5.5 shows the posterior...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated accounts receivable, weakening $US On October 15, 2018, our company sells to a retailer located in Austria...
-
Haslett Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2011, the company reported the following operating results while operating at 90% of...
-
Tyler Company budgets the following unit sales for the next four months: April, 3,000 units; May, 4,000 units; June, 6,000 units; and July, 2,000 units. The company's policy is to maintain finished...
-
Explain the key features of project benefits management and how they contribute to enhancing project value.
-
Draw an earned value chart for the end of the first week (7 days) assuming the time proportionality rule for the project illustrated in the following network diagram given the following costs and...
-
Leven Clinic uses client-visits as its measure of activity. During September, the clinic budgeted for 3,000 client-visits, but its actual level of activity was 3,050 client-visits. The clinic has...
-
The gecko is a reptile with an amazing ability to climb smooth surfaces, including glass. Recent discoveries indicate that geckos stick to smooth surfaces via van der Waals interactions between...
-
1- Kellogg's uses its corporate brand name with its individual product brands as with Kellogg's rice krispies, Kellogg's raisin bran, and Kellogg's corn flakes. Which branding strategy is being used...
-
What are the two parts of the Feds dual mandate? Which of the two targets appears to be more variable? Explain your reasoning.
-
Whereas IO theory emphasizes the influence of industry factors of firm performance, resource-based theory emphasizes the role of firm factors. True or False
-
Corporate restructuring involves the acquisition of business units unrelated to the firms core business unit. True or False
-
The intended strategy and the realized strategy can never be the same. True or False
-
What is the difference between social responsibility and managerial ethics?
-
Stock 1 has an expected annual return of 6% and a standard deviation of 27%. Stock 2 has an expected annual return of 10% and a standard deviation of 15%. Their correlation is 0.58. You invest 20% in...
-
The cash records of Holly Company show the following four situations. 1. The June 30 bank reconciliation indicated that deposits in transit total $720. During July, the general ledger account Cash...
-
Given the following information, prepare in good form an income statement for the Dental Drilling Company. Selling and administrative expense $ 112,000 Depreciation expense 73,000 Sales 489,000...
-
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend. The capital accounts for the firm are as...
-
Defense Systems Inc. has convertible bonds outstanding that are callable at $1,070. The bonds are convertible into 33 shares of common stock . The stock is currently selling for $39.25 per share. a....
-
Explain the principle of hit-and-run entry in the context of a perfectly contestable market.
-
Is it possible for a firm or firms operating in a natural monopoly to be subject to contestability? Explain.
-
Firms like Google, Facebook, Amazon, Apple and Netflix are relatively new players in their respective markets, albeit that all are basically part of the tech industry. They can all be seen as having...
Study smarter with the SolutionInn App