You have data on prices of two level-coupon bonds. Both of them have two years to maturity,
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Question:
You have data on prices of two level-coupon bonds. Both of them have two years to maturity, face value of $1,000 and pay annual coupons. The first bond pays a 5% coupon and sells for $1,000.92, and the second one pays a 1% coupon and sells for $925.81. You also know that the price of a three-year zero-coupon bond with face value of $1,000 is $816.30.
Required
(a) Using any approach you want, determine the term structure of the spot interest rates and the term structure of the forward rates.
(b) Suppose that a bank offers you a forward rate of f3 = 9%. If there is an arbitrage opportunity, describe how you would take advantage of it
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
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