help with fins2624 quiz please (1 Viewer)

[wantingtoknow]

Suppose you observe the three following bonds in the market:

• A two-year zero-coupon bond with a face value of $100 trading for $89.00
• A two-year bond with a face value of $100 and a $10 coupon trading for $107.51
• A two-year bond with a face value of $100 and a $20 coupon trading for $127.53

Which of the following statements is true?


Answer

	A.	There is a possible arbitrage trade involving a long position in bond C
	B.	There is a possible arbitrage trade involving a short position in bond C
	C.	There is a possible arbitrage trade not involving bond C at all
	D.	There are no arbitrage opportunities in this market thank you!

 

[Shadowdude]

Find the yield to maturity.

Remember that you "buy low, sell high".



Those two things should help you figure out the answer.

 

[wantingtoknow]

so I use bond A to find the YTM? then with that YTM, I apply it to bond C to find PV and compare with the trading price. is that it? :S

 

[Shadowdude]

Or Bond B. Just remember what arbitrage means - riskless profit today, and no profit in future.

 

[wantingtoknow]

hm okies, thank you.