How might an arbitrageur capitalize on the opportunity

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Reference no: EM131315451

Suppose that an investor has agreed to pay $94,339.62 for a one-year discount bond in one year. Two years from now, the investor will receive the bond's face value of $100,000.

The current effective annual risk-free rate of interest is 5.8 percent, and the current spot price for a two-year discount bond is $88,999.64.

Has the investor agreed to pay too much or too little? How might an arbitrageur capitalize on this opportunity?

Reference no: EM131315451

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