The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-year maturity coupon bonds with coupon rates of 12% (paid anually) is 5.8%.
a) What arbitrage opportunity is available for an investment banking firm?
b) What is the profit on the activity?