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    Market Trades a Default Free Zero Coupon Bond

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    The market trades a default-free zero coupon bond that pays $100.00 in one year. This bond trades at $94.34. Also traded is a coupon bond that pays a coupon of $4:00 after six months, and makes a final payment of $104:00 (the last coupon and the principal) in one year. This bond trades at $102:00. Moreover, a six month zero-coupon bond is traded at $98.20, and pays $100.00 at maturity.

    Is there arbitrage in this market? If yes, provide an example of an arbitrage strategy?

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    Solution Summary

    The expert examines market trades for a default free zero coupon bond.