The YTM on 1-year zero-coupon bonds is 5 per cent and the YTM on 2-year zeros is 6 per cent. The YTM on 2-year-maturity coupon bonds with coupon rates of 12 per cent (paid annually) is 6 per cent. What arbitrage opportunity is available for an investment banking firm? What is the profit on the activity? Assume US $ denominated bonds with par value of $1000 for all calculations.

The YTM on 1-year zero-coupon bonds is 5 per cent and the YTM on 2-year zeros is 6 per cent. The YTM on 2-year-maturity coupon bonds with coupon rates of 12 per cent (paid annually) is 6 per cent. What arbitrage opportunity is available for an investment banking firm? What is the profit on the activity? Assume US $ denominated bonds with par value of $1000 for all calculations.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 10QTD

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