Suppose that an investor has agreed to pay $94,339 62 for a one year discount bond in one year Two years from now, the investor will receive the bonds face value of $100,000 The current effective annual risk free rate of interest is 5 8 , and the current spot price for a two year discount bond is $...

Fair forward price 8899964 1 058 9416162 The investor is paying too much An arbitra ...

Suppose that an investor has agreed to pay $94,339.62 for a one-year discount bond in one year.

Question:

Suppose that an investor has agreed to pay $94,339.62 for a one-year discount bond in one year. Two years from now, the investor will receive the bond’s of $100,000. The current effective annual risk-free rate of interest is 5.8%, and the current spot price for a two-year discount bond is $88,999.64. Has the investor agreed to pay too much or too little? How might an arbitrageur capitalize on this opportunity?
Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...