Suppose you the following Bond prices in the market:

 

1) $1,000 for a two year 10% annual coupon bond.

2) $44 for a one year pure discount bond with a face value of $50.

3) $900 for a year-year pure discount bond with a face value of $1,100.

 

Assume your firm can buy and sell bonds with no transaction costs. Is there an arbitrage opportunity? If so, what is the profit from a trade that creates positive cash flow in year 0 with zero cash flows in years 1 and 2?

Answer rating: 100% (QA)

Lets analyze the given bond prices Twoyear 10 annual coupon bond Face value 1000 Coupon rate 10 of t... View the full answer