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If the price of the bond is actually 950 what is the

Question: A bond promises a risk-free payment of $1000 in one year. The risk-free rate of interest is 2.19%.

a) What is the price of the bond?

FV=$1,000 and r=2.09%=0.0219

Price of the bond = FV/(1+r)^n = $1000/1.0219 = $978.57

b) If the price of the bond is actually $950, what is the arbitrage strategy? Illustrate all cash flows today and one year from today.

c) If the price of the bond is actually $1000, what is the arbitrage strategy? Illustrate all cash flows today and one year from today.

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