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The yield to maturity (YTM) on 1-year zero-coupon bonds is 7% and the YTM on 2-year...

The yield to maturity (YTM) on 1-year zero-coupon bonds is 7% and the YTM on 2-year zeros is 8%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 11% (paid annually) is 7.5%.

a. What arbitrage opportunity is available for an investment banking firm?

The arbitrage strategy is to buy zeros with face values of $  and $  , and respective maturities of one year and two years.

b. What is the profit on the activity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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