A 5-year zero coupon bond is stated to yield 10% continuously compounded return for the entire period (holding period return over 5 years) in market A. The same bond is quoted 2% per annum with annual compounding in Market B. Where is the bond cheaper and what is the arbitrage profit as a percentage of Par.
| a. |
Cheaper in Market A and the arbitrage profit is 0.08934% |
| b. |
Cheaper in Market A and the arbitrage profit is 0.06734% |
| c. |
Both prices are equal; there is no arbitrage |
| d. |
Cheaper in Market B and the arbitrage profit is 0.06734% |
| e. |
Cheaper in Market B and the arbitrage profit is 0.08934% |