Consider the following STRIP Bonds, the settlement date is 12/10/2022:

Maturity	STRIP Price	YTM/spot rate
6/15/2023	96	8.11%
12/15/2023	92	8.57%
6/15/2024	89	8.00%
12/15/2024	85	8.40%
6/15/2025	81	8.74%
12/15/2025	75	10.02%
6/15/2026	70	10.68%
12/15/2026	68	10.08%
6/15/2027	65	10.01%
12/15/2027	63	9.65%
6/15/2028	58	10.38%
12/15/2028	55	10.45%

A. An insurance company projects claims of $250m, $300m, and $500m, 3, 4, and 5 years later. If the company wants to match the projected liabilities with STRIPs, how much would the strategy cost today? Will the strategy protect the company from cash-flow risk?

B. Using the above spot rates, what is the price of a 5-year, 4.5% bond? Assume semiannual interest payments. What is the YTM of the 5-year T-bond?

C. If the 5-year T-bond is selling for 110, is there an arbitrage opportunity?

D. How much is the arbitrage profit? What are the required trades to exploit the arbitrage opportunity?

Answer rating: 100% (QA)

A The strategy would cost 1 059 375 today This str... View the full answer