Describe the cash flows to a long position in the 10, Finance Basics

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Describe the cash flows to a long position in the 10

A zero-coupon bond maturing two years from now has a yield to maturity of 8 percent (annual compounding). Another zero-coupon bond with the same maturity date has a yield to maturity of10 percent (annual compounding). Both bonds have a face value of $100.

a. What are the prices of the zero-coupon bonds?

b. Describe the cash flows to a long position in the 10 percent zero-coupon bond and a short position in the 8 percent zero-coupon bond.

c. Are the cash flows in part b indicative of arbitrage?

d. Suppose the 10 percent bond matured in 3 years rather than 2 years. Is there arbitrage now?

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Finance Basics: Describe the cash flows to a long position in the 10

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Finance Basics: Describe the cash flows to a long position in the 10

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