A three-year, 4 percent government bond is trading at $1,001. The spot yield curve indicates that the
Question:
A three-year, 4 percent government bond is trading at $1,001. The spot yield curve indicates that the 1-year spot rate is 2 percent, the 2-year spot rate is 3 percent, and the 3-year spot rate is 4 percent. Is there an arbitrage opportunity, that is, is it possible to earn a riskless profit by constructing a portfolio with no net investment (assume all transaction costs are zero)? Describe this portfolio.
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Finance For Executives Managing For Value Creation
ISBN: 9781473749245
6th Edition
Authors: Gabriel Hawawini, Claude Viallet
Question Posted: