Question

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.)**

Answer #1

The price of the coupon bond, based on its yield to maturity, is:

[$110 ×Annuity factor (7.5%, 2)] + [$1,000 × PV factor (7.5%, 2)]

= $1,062.84

If the coupons were stripped and sold separately as zeros, then, based on the yield to maturity of zeros with maturities of one and two years, respectively, the coupon payments could be sold separately for:

[$110 / 1.07] + [$1,110 / 1.08^{2}] = $102.80 + $951.65
= $1,054.45

The arbitrage strategy is to buy zeros with face values of $110 and $1,110, and respective maturities of one year and two years, and simultaneously sell the coupon bond. The profit equals $8.39 on each bond.

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...

The yield to maturity (YTM) on 1-year zero-coupon bonds is 5%
and the YTM on 2-year zeros is 6%. The yield to maturity on
2-year-maturity coupon bonds with coupon rates of 12% (paid
annually) is 5.8%.
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...

The yield to maturity (YTM) on 1-year zero-coupon bonds is 5%
and the YTM on 2-year zeros is 6%. The yield to maturity on
2-year-maturity coupon bonds with coupon rates of 8% (paid
annually) is 5.5%.
a. What arbitrage opportunity is available for an
investment banking firm?
b. What is the profit on the activity? (Do
not round intermediate calculations. Round your answer to 2 decimal
places.)

3. The yield to maturity on 1-year zero-coupon bonds is
currently 7%; the YTM on 2-year zeros is 8%. The Treasury plans to
issue a 2-year maturity coupon bond, paying coupons once
per year
with a coupon rate of 9%. The face value of the bond is
$100.
c. If the expectations theory of the yield curve is
correct, what is the market expectation of the price for which the
bond will sell next year?
d. Recalculate your answer to...

Consider the following $1,000 par value zero-coupon
bonds:
Bond
Years to Maturity
YTM(%)
A
1
6.5
%
B
2
7.5
C
3
8.0
D
4
8.5
According to the expectations hypothesis, what is the market’s
expectation of the yield curve one year from now? Specifically,
what are the expected values of next year’s yields on bonds with
maturities of (a) one year? (b) two years? (c) three years?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)

The yield-to-maturity (YTM) on one-year bond with zero coupon
and face value $ 1000 is 5 %. The YTM on two-year bond with 5 %
coupon paid annually and face value $ 1000 is 6 %. (i) What are the
current prices of these bonds? (ii) Find Macaulay durations of
these bonds. Consider a third bond which is a zero coupon two-year
bond with face value $ 1000. (iii) What must be the price of the
third bond so that...

The current yield curve for Treasury zero-coupon bonds is as
follows:
Maturity YTM
1)7%
2 )6%
3) 8%
If the market expectations are accurate, what will the two-year
zero coupon yield be one year from now? Answer in percentages, with
two decimal places.

The maturities and yields of three zero-coupon bonds are as
follows:
Maturity
YTM
1
4%
2
5%
3
6%
Next year, you expect the yields on zero-coupon bonds to be as
follows:
Maturity
YTM
1
5%
2
6%
3
7%
What is the market's expectation of the rate of
return on a 3-year zero-coupon bond over the coming year, assuming
the expectations hypothesis holds? Please express your answer in
percent rounded to the nearest basis point.

Consider the following $1,000 par value zero-coupon bonds:
Bond
Years to Maturity
YTM(%)
A
1
6.0
%
B
2
7.0
C
3
7.5
D
4
8.0
According to the expectations hypothesis, what is the market’s
expectation of the yield curve one year from now? Specifically,
what are the expected values of next year’s yields on bonds with
maturities of (a) one year? (b) two years? (c) three years?
Bond
YTM
YTM (%)
B
1
C
2
D
3

The term structure for zero-coupon bonds is currently:
Maturity (Years)
YTM(%)
1
4.3
%
2
5.3
3
6.3
Next year at this time, you expect it to be:
Maturity (Years)
YTM(%)
1
5.3
%
2
6.3
3
7.3
a. What do you expect the rate of return
to be over the coming year on a 3-year zero-coupon bond?
(Round your answer to 1 decimal place.)
b-1. Under the expectations theory, what yields to
maturity does the market expect to observe...

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