Suppose you have the following three zero-coupon bond (ZCB) available: a 1-year ZCB that costs $97, a 2-year ZCB that costs $95, and a 3-year ZCB that costs $92. Assume that the par values are $100. a. What must the price of a 3-year coupon bond with at 8% coupon rate?
b. How would you make an arbitrage profit if the coupon bond was trading at $100?
c. How much arbitrage profit would you make per $100 of the 3-year coupon bond trade?

Bond price = Par value / (1 + 1 year spot rate)1

$97 = $100 / (1 + 1 year spot rate)^1

(1 + 1 year spot rate)^1 = $100 / $97

(1 + 1 year spot rate) = 1.030928

1 year spot rate = 3.0928%

Bond price = Par value / (1 + 2 year spot rate)^2

$95 = $100 / (1 + 2 year spot rate)^2

(1 + 2 year spot rate)^2 = $100 / $95

(1 + 2 year spot rate)^2 = 1.052632

(1 + 2 year spot rate) = (1.052632)(1 / 2)

(1 + 2 year spot rate) = 1.025978

2 year spot rate = 2.5978%

Bond price = Par value / (1 + 3 year spot rate)^3

$92 = $100 / (1 + 3 year spot rate)^3

(1 + 3 year spot rate)^3 = $100 / $92

(1 + 3 year spot rate)^3 = 1.086957

(1 + 3 year spot rate) = (1.086957)(1 / 3)

(1 + 3 year spot rate) = 1.028184

3 year spot rate = 2.8184%

Coupon per period = (Coupon rate / No of coupon payments per year) * Par value

Coupon per period = (8% / 1) * $100

Coupon per period = $8

a) Bond price = Coupon / (1 + 1 year spot rate)^1 + Coupon / (1 + 2 year spot rate)^2 + (Coupon + Par value) / (1 + 3 year spot rate)^3

Bond price = $8 / (1 + 3.0928%)^1 + $8 / (1 + 2.5978%)^2 + ($8 + $100) / (1 + 2.8184%)^3

Bond price based on spot rates = $114.7199

b. Bond price based on spot rates is greater than traded bond price to exploit this arbitrage the following strategy must be implemented

The 3 year 8% coupon bond should be bought at $100.

Portfolio = -$100

1 year zero coupon bond with face value $8 must be sold

Portfolio = (Price of 1 year zero coupon bond / Face value) * Amount of Face value to be Sold

Portfolio = ($97 / $100) * $8

Portfolio = $7.76

2 year zero coupon bond with face value $8 must be sold

Portfolio = Price of 2 year zero coupon bond / Face value) * Amount of Face value to be Sold

Portfolio = ($95 / $100) * $8

Portfolio = $7.6

3 year zero coupon bond with face value $108 must be sold

Portfolio = Price of 3 year zero coupon bond / Face value) * Amount of Face value to be Sold

Portfolio = ($92 / $100) * $108

Portfolio = $99.36

Arbitrage profit = -$100 +  $7.76 + $7.6 + $99.36

Arbitrage profit = $14.72

c) Arbitrage profit = Bond price based on spot rates - Traded Bond price

Arbitrage profit = $114.72 - $100

Arbitrage profit = $14.72

Arbitrage profit would you make per $100 = $14.72

answer; communities of interest; i believe this is correct, plz check first good luck;

hi,

henry is an economist and wants to understand the relationship between inflation and consumer spending habits. for his research, he needs the consumer price index for 2014 and the inflation rate. based on the prices of goods given, what will he find to be the cpi and inflation rate for 2014? assume that a consumer’s basket for three consecutive years consists of the following:

you dont privide answer choices.

answer - 15% of a inflatation rate is 15% less in cpi