A suppose a 74 semi-annual coupon 10-year treasury issue, Ask an Expert

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a. Suppose a 7.4% semi-annual coupon 10-year Treasury issue with a par value of $100 issue is priced in the market based on the on-the-run 10-year Treasury yield. Assume further that this yield is 5.86%, so that each cash flow is discounted at 5.86% divided by 2. What is the market price of the Treasury issue based on this assumption?

b. Suppose also that the price of the same Treasury issue would be $110.3324 if it is calculated based on the prevailing Treasury spot rate curve. What action would a dealer take and what would the arbitrage profit be? Can this situation persist in the long run?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92688094

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