True or False

Part II: True and False (15%) Justify your answers in a precise and concise way. You are allowed to make assumptions. 1) (Bond) Convertible bonds offer options to holders to transfer the bonds into stock shares. A convertible bond therefore should have a higher yield than regular bonds with the same characteristics (Maturity, face value, coupon rate). (5%) 2) (Future arbitrage) In a 2-year futures contract on the S&P 500 index, the future price is now 460. If the index currently stands at 400 points and the risk-free rate is 10% annually. Assuming there is no dividend payment during the life of the contract, then there exists an arbitrage opportunity that can be exploited by taking a short position in a future contract. (5%) F, = S, (1+r) 3) (Duration) A government bond and a corporation bond have the same face value, the same maturity and the same coupon rate. Since government bond is safer compared to the corporation bond, it should have a lower duration. (5%)