The yield to maturity (YTM) on 1-year zero-coupon bonds is 8% and the YTM on 2-year zeros is 9%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 11% (paid annually) is 8.5%. a. What arbitrage opportunity is available for an investment banking firm? b. What is the profit on the activity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer rating: 100% (QA)

To identify the arbitrage opportunity and calculate the profit we need to compare the yields to maturity of the different bonds and determine if there ... View the full answer