What is the price of the bond

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Reference no: EM132206468

Question - A bond promises a risk-free payment of $1000 in one year. The risk-free rate of interest is 3.11%.

a) What is the price of the bond?

b) If the price of the bond is actually $950, what is the arbitrage strategy? Illustrate all cash flows at time 0 and at time 1.

c) If the price of the bond is actually $990, what is the arbitrage strategy? Illustrate all cash flows at time 0 and time 1.

Hint: you are able to borrow money from the bank, or deposit money into the bank, at the risk-free rate of interest. After one year you will pay back your loan plus interest, or receive your savings plus interest.

Reference no: EM132206468

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