It's lunchtime. You are thinking about this restaurant, Le Trsor de la Cathdrale, where you have...
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It's lunchtime. You are thinking about this restaurant, Le Trésor de la Cathédrale, where you have always wanted to go but never did because you thought it was too pricey. Luckily, you bump into your friend Jeffrey, a bond trader. Today Jeffrey is buying and selling the following bonds: Bond Coupon rate (%) A 0 B с t 5 7 Maturity YTM (%) 1 year 2 years 2 years 5.00 5.85 6.25 Coupon payments are annual, and bid-ask spreads are zero. (a) What are the prices of the above bonds? (b) Is it possible to construct an arbitrage (and get a free lunch at Le Trésor de la Cathédrale) given the bond prices? If so, what is the trading strategy that will produce £600 to pay for your lunch? Hint: Given the prices of two bonds, determine whether the third bond is over- or under-priced. It's lunchtime. You are thinking about this restaurant, Le Trésor de la Cathédrale, where you have always wanted to go but never did because you thought it was too pricey. Luckily, you bump into your friend Jeffrey, a bond trader. Today Jeffrey is buying and selling the following bonds: Bond Coupon rate (%) A 0 B с t 5 7 Maturity YTM (%) 1 year 2 years 2 years 5.00 5.85 6.25 Coupon payments are annual, and bid-ask spreads are zero. (a) What are the prices of the above bonds? (b) Is it possible to construct an arbitrage (and get a free lunch at Le Trésor de la Cathédrale) given the bond prices? If so, what is the trading strategy that will produce £600 to pay for your lunch? Hint: Given the prices of two bonds, determine whether the third bond is over- or under-priced.
Expert Answer:
Answer rating: 100% (QA)
To determine the prices of the bonds we can use the present value formula for bonds The present value of a bond is calculated as the sum of the presen... View the full answer
Related Book For
Project Management The Managerial Process
ISBN: 9781260570434
8th Edition
Authors: Eric W Larson, Clifford F. Gray
Posted Date:
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