Prices of zero-coupon, default-free securities with face values of $1,000 are summarized in the following...
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Accounting
Prices of zero-coupon, default-free securities with face values of
$1,000 are summarized in the following table:
Maturity (years)
1
2
3
Price (per
$1,000
face value)
$973.92
$941.35
$906.67
Suppose you observe that a three-year, default-free security with an annual coupon rate of 10% and a face value of $1,000 has a price today of
$1,184.84. Is there an arbitrage opportunity? If so, show specifically how you would take advantage of this opportunity. If not, why not? Question content area bottom
A) Is there an arbitrage opportunity?
B) How would you take advantage of the arbitrage opportunity?(Select from the drop-down menus.)
Buy___coupon bond(s), sell short ___one-year Zero(s), sell short ___two-year Zero(s), and sell short ___ three-year Zero(s).
C) This would result in a net profit of: ?
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