Purchase Solution

Forward rates, Arbitrage

Not what you're looking for?

Ask Custom Question

Please see attachment for tables and pre-question information.


Suppose the following coupon info

Maturity (year) Coupon Rate price
1 0% 97
2 3.00% 99
2 0% 91
3 4.00% 98
3 0% 87
Please note there are arbitrage opportunities (shown below).

The 1-yr rate implied by the 1-yr zero coupon bound is
= 100/97 - 1 = 3.09%
The 2-yr rate implied by the 2-yr zero coupon bound is
91 = 100/ = - 1 = 4.828%
The 2-yr rate implied by the 2-yr coupon bound is
99 = = 3.5%
The 3-yr rate implied by the 3-yr zero coupon bound is
87 = 100/ = - 1 = 4.75%
The 3-yr rate implied by the 3-yr coupon bound is
98 = = 4.75%

The 2-year rates implied by coupon bond is different to those implied by zero coupon bonds. Hence there is arbitrage opportunity for this segment of term structure.


1. Is there any other arbitrage opportunity?
2. Given above bonds, what are the implied forward rates?
3. If one was to invest $1,000 two years from now for one year. Which would be the best strategy (what forward rate to use)? What is the return?

Purchase this Solution

Solution Summary

The solution identifies arbitrage opportunities and calculates the implied forward rates.

Purchase this Solution

Free BrainMass Quizzes

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.


This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)