Question: 14. Exercises for Fixed-Income Arbitrage To answer problems 141-14.?r consider the following bonds, each with a face value of 5100: Type of bond Maturity Coupon

14. Exercises for Fixed-Income Arbitrage To answer problems 141-14.?r consider the following bonds, each with a face value of 5100: Type of bond Maturity Coupon Price TIM 2e ro coupon 1 D 96.32 3.32% 2e ro coupon 2 D Pzero 4.50% 2e ro coupon 3 D 89.11 if Annual-pay coupon 2 5% P_coupon 14.1 Price and yield. What is the price of the 2-year zero-coupon bond, P__2ero? What is the yield to maturity of the 3-year zero coupon bond? 14.2 lilo arbitrage pricing. Which price would be consistent with no arbitrage for the annual-pay coupon bond {i.e., a bond that pays 55 after one year and 5105 after two years]? 14.3 Fixed income arbitrage. Suppose that the coupon bond trades at a price of SIDIDD. a. What arbitrage trade would you do? b. Suppose that you hold this arbitrage position until maturity in two years. What will be your profit in dollars? What is the annual return as a percentage of the value of the long side of the position? If the margin requirement is 10% for all long and short positions, what is the initial margin requirement in dollars? What is the annual return as a percentage of this initial margin requirement? c. Suppose that, after one yearIr the yield to maturity on all bonds is 5%. What is the profit or loss in dollars at this time? What is the annual return as a percentage of the initial margin requirement? d. Suppose that the yield to maturity on all bonds becomes 5% already 1 month after you put on the trade. What is the prot or loss in dollars at this time? What is the annual return as a percentage of the initial margin requirement? 14.4 Forward rates and directional tted income trading. a. What is the forward rate from time 1 to time 2 implied by the above zero-coupon bond prices? b. Suppose that you believe that the 1-year interest rate will be 4% in one year from now [based on your views on central bank policy]. What trade would you consider as a result of the difference between your view and the forward rate? 14.5 \"field curve. Plot the zero-coupon yield curve, that is, the yields on zero-coupon bonds as a function of their time to maturity. Include the overnight interest rate of 33%

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