The current market price of a two-year 25% coupon bond with a $1,000 face value is $1,219.71
Question:
The current market price of a two-year 25% coupon bond with a $1,000 face value is $1,219.71 (recall that such a bond pays coupons of $ 250 at the end of Years 1 and 2, and the principal of $ 1,000 at the end of year 2). The current market price of a one-year zero-coupon bond with a $50 face value is $44.64.
(a) What must the price of a two-year zero-coupon with a $2,500 face value be in order to avoid arbitrage?
(b) Suppose the price of the two-year zero-coupon bond with a $ 2,500 face value is only $1,900. Is there an arbitrage opportunity? Is yes, how would you structure a trade that has zero cash-flow in Years 1 and 2 and a positive cash-flow only in year 0 (i.e. now)?
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen