Answer the following questions given the Treasury note quotes below. (For our purposes assume that we are exactly 6 months between coupons. Also assume that there is no interest income on reinvested coupons.)

Date Coupon Ask Price Ask Yield

December 2022 7.5% 1015 5.90%

December 2023 7.5% 1017 6.60%

Question 1: Given these quotes and assuming that the yield curve will remain constant, what, if any, profits can be made by using this strategy for a one year holding period?

A. $0

B. $73.32

C. $13.32

D. $59

Question 2: Given your answer in previous question, how many basis points, if any, can you pick-up by using this strategy?

A. 70 basis points

B. 131 basis points

C. 0 basis points

D. 61 basis points

Question 3. Removing the assumption of the constant yield curve, what is the lowest possible selling price for the 2023 (2 year) note, after one year, for this strategy to be profitable?

A. $1009

B. $1000

C. $1002

D. $1001

Question 4: When performing such a strategy it is important to be aware of the potential risk of your interest rate predictions being wrong. By how much would the yield on the 2023 bond have to increase in one year for your profits to be eliminated? [Hint: you can do this by solving for the yield to maturity given the price found in the previous question and using n = 2 periods.]

A. 90 basis points

B. 0 basis points

C. 69 basis points

D. 79 basis points