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How would you make an arbitrage profit

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Reference no: EM132758057

Question: Suppose you have the following three zero-coupon bond (ZCB) available:

a 1-year ZCB that costs $97, a 2-year ZCB that costs $95, and a 3-year ZCB that costs $92. Assume that the par values are $100.

a) What must the price of a 3-year coupon bond with at 8% coupon rate?

b) How would you make an arbitrage profit if the coupon bond was trading at $100? How much arbitrage profit would you make per $100 of the 3-year coupon bond trade?

Reference no: EM132758057

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