Assume that a 12% coupon bond maturing in 2 years sells for $108 while an 8% bond maturing in 2 years sells for a fair price (that you were expected to compute.Assume also that there is a 2-year zero-coupon bond selling for a fair price (based on the given forward rates). 

How can you make an arbitrage by trading only these three bonds?

State how many of each bond you want to buy or sell (assume you can freely short-sell any bond) and your net cash at each point in time? Note that to make arbitrage you must have non-negative profit at any point in time and strictly positive profit at least at one point in time.

Answer rating: 100% (QA)

Arbitrage Opportunity with Bonds To make an arbitrage profit by trading the given bonds we need to exploit any pricing discrepancies between these bonds Arbitrage opportunities arise when we can creat... View the full answer