1. A 5-year zero coupon bond is stated to yield 10% continuously compounded return for the entire period (holding period return over 5 years) in market A. The same bond is quoted 2% per annum with annual compounding in Market B. Where is the bond cheaper and what is the arbitrage profit as a percentage of Par.
a. Cheaper in Market A and the arbitrage profit is 0.06734%
b. Cheaper in Market B and the arbitrage profit is 0.08934%
c. Both prices are equal; there is no arbitrage
d. Cheaper in Market A and the arbitrage profit is 0.08934%
e. Cheaper in Market B and the arbitrage profit is 0.06734%
2. The present value (t=0) of the following cash flow stream is $5,979.04 when discounted at 12 percent annually. What is the value of the missing (t=2) cash flow?
Period 1= $1,000
Period 2=?
Period 3= $2,000
Period 4= $2,000