Bond Arbitrage - Brainteaser
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Bond Arbitrage
Finance
Easy
Reported at: 1 firmJ.P. Morgan
A risk-free bond yields 5% per annum, while the bank offers a 3% annual interest rate. You may borrow or lend at the bank rate and buy or short-sell the bond. Assuming a notional amount of $100 and no transaction costs, determine whether an arbitrage opportunity exists, and if so, calculate the arbitrage profit after one year.
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