Consider an economy with three dates (t=0,1,2) and two safe bonds. Bond A has 2% coupon and Bond B has 3% coupon. The payoffs and prices of the bonds are given as follows price at t=0 99.50 Bond A Bond B t=1 2 3 t=2 102 103 (a) Is there an arbitrage? (b) If yes, find an arbitrage portfolio. 100.25

Consider an economy with three dates (t=0,1,2) and two safe bonds. Bond A has 2% coupon and Bond B has 3% coupon. The payoffs and prices of the bonds are given as follows price at t=0 99.50 Bond A Bond B t=1 2 3 t=2 102 103 (a) Is there an arbitrage? (b) If yes, find an arbitrage portfolio. 100.25

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Consider an economy with three dates (t=0,1,2) and two safe bonds. Bond A has 2% coupon
and Bond B has 3% coupon. The payoffs and prices of the bonds are given as follows
price at t=0
99.50
Bond A
Bond B
t=1
2
3
t=2
102
103
(a) Is there an arbitrage?
(b) If yes, find an arbitrage portfolio.
100.25

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