There are two two-year coupon bonds. Both have par value of $1000. Bond A has an annual coupon of $5 and Bond B has an annual coupon of $6. Bond A is selling at $930 and Bond B is selling at $960. 

 (A)      If you buy 100 unit Bond A and sell 100 unit Bond B, is it an arbitrage and why? You can use cash flow table to support your answer.

 (B)      To buy 100 unit of Bond A, what is the range of unit you can sell Bond B to conduct an arbitrage? [You can set X unit of Bond B and then solve for the range of X]

Answer rating: 100% (QA)

To determine if there is an arbitrage opportunity we need to compare the cash flows from buying 100 ... View the full answer