Question 4 (a.) Suppose you have the following information on a coupon paying bond and zero...

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Question 4 (a.) Suppose you have the following information on a coupon paying bond and zero coupon bonds: A 2 year, 3% coupon paying bond (annual coupon payments) with a face value of $1,000 and a yield to maturity of 2.75%. The price of a 1 year zero coupon paying bond with a face value of $100 is 97.56098. The price of a 2 year zero coupon paying bond with a face value of $100 is 94.25959. Explain whether an arbitrage opportunity exists and what you would do. Clearly explain the link between those three different bonds. [40 marls] for(2.) A Certificate of Deposit (CD) with an initial investment of 1m was issued 60 days ago at a yield of 2.75%. The CD matures in 28 days and has a current yield of 2.85%. Calculate the correct price of the CD today. Lecture 6 (2) [20 marks] (c.) 'A 10 year UK Government bond is not risk free'. Discuss this statement and explain what determines interest rate sensitivity. [20 marks] (d.) Explain what the difference is between a callable and a convertible bond and compare the yield against conventional fixed coupon corporate bonds with the same time to maturity. [20 marks] Question 4 (a.) Suppose you have the following information on a coupon paying bond and zero coupon bonds: A 2 year, 3% coupon paying bond (annual coupon payments) with a face value of $1,000 and a yield to maturity of 2.75%. The price of a 1 year zero coupon paying bond with a face value of $100 is 97.56098. The price of a 2 year zero coupon paying bond with a face value of $100 is 94.25959. Explain whether an arbitrage opportunity exists and what you would do. Clearly explain the link between those three different bonds. [40 marls] for(2.) A Certificate of Deposit (CD) with an initial investment of 1m was issued 60 days ago at a yield of 2.75%. The CD matures in 28 days and has a current yield of 2.85%. Calculate the correct price of the CD today. Lecture 6 (2) [20 marks] (c.) 'A 10 year UK Government bond is not risk free'. Discuss this statement and explain what determines interest rate sensitivity. [20 marks] (d.) Explain what the difference is between a callable and a convertible bond and compare the yield against conventional fixed coupon corporate bonds with the same time to maturity. [20 marks]