Consider two bonds:

an on-the-run 5-year zero-coupon bond (bond A) with YTMtA = 2.6%
an off-the-run 5-year zero-coupon bond (bond B) with YTMtB =3.1%.

Over the next year, the on-the-run bond has repo rate of 1% while the off-the-run has a repo rate of 1.50%.

A hedge fund expects that the two bonds have the same YTM as each other in one year from now

    YTMt+1A =YTMt+1B

The hedge fund expects that the return on going long the off-the-run and short the on-the-run, fully financed in the repo market (i.e., no margin requirements) is?

Answer rating: 100% (QA)

To calculate the expected return on going long the offtherun bond and short the ontherun bond we nee... View the full answer