Three zero coupon Treasury notes with a face value of $1,000 each and maturity of 1, 2 and 3 years are traded with the following prices: $980.4, $942.6 and $889, respectively. A 3-year Treasury security with a coupon rate of 5% and a face value of $1,000 is currently traded with a price of $1,027. Do these bond prices present an arbitrage opportunity? If so, show specifically how you would take advantage of this opportunity. If not, why not?

Answer rating: 100% (QA)

To determine if there is an arbitrage opportunity we need to compare the prices of the zero coupon Treasury notes and the 3year Treasury security with ... View the full answer