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 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 $88,999.64. Has the investor agreed to pay too much or too little? How might an arbitrageur capitalize on this opportunity?
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