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A two yr. treasury bond has annual coupon pmts. The bond is a 5% par value bond with an annual effective interest rate of 5.84%. A one year zero coupon treasury bond has an effective interest rate of 2%. Suppose a two yr zero coupon bond yield rate is 4%. Describe how an arbitrage situation could be developed for a profit when you either sell or buy one of the two year coupon bonds with a redemption value of $1000?

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Financial Management, Finance

Category:- Financial Management
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