Consider the following US government (risk-free) bonds: Bond A: 2-year note issued one year ago with...

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Consider the following US government (risk-free) bonds:
Bond A: 2-year note issued one year ago with a coupon rate of5%
Bond B: 3-year note issued two years ago with a coupon rate of5%
The price of the first bond is 100 and the price of the secondbond is 101. For simplicity, assume that investors do not facemargin requirements or interest payments to short-sell assets.
a. Assume there are no transaction costs. Establish an arbitragetrade to profit from the pricing of these bonds. What would be theprofit in USD per pair of bonds traded?
b. Assume that transaction costs are 1% of the face value of thebond per transaction. Selling and buying a bond are two separatetransactions. What is the net gain/loss of implementing thestrategy from the previous question?
c. The US government issues a one-year bond that makessemi-annual coupons with one year maturity and $100 face value.Under the absence of arbitrage assumption, what would be the priceof this bond if:
i. Bond A is correctly priced and Bond B is incorrectlypriced?
ii. Bond B is correctly priced and Bond A is incorrectlypriced?

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a Assume there are no transaction costs Establish an arbitrage trade to profit from the pricing of these bonds What would be the profit in USD per pair of bonds traded Both the bonds have one year to go and have identical cash flows of one coupon Face value at the end of one year But they have different prices Hence there is an arbitrage opportunity See Answer

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Consider the following US government (risk-free) bonds:Bond A: 2-year note issued one year ago with a coupon rate of5%Bond B: 3-year note issued two years ago with a coupon rate of5%The price of the first bond is 100 and the price of the secondbond is 101. For simplicity, assume that investors do not facemargin requirements or interest payments to short-sell assets.a. Assume there are no transaction costs. Establish an arbitragetrade to profit from the pricing of these bonds. What would be theprofit in USD per pair of bonds traded?b. Assume that transaction costs are 1% of the face value of thebond per transaction. Selling and buying a bond are two separatetransactions. What is the net gain/loss of implementing thestrategy from the previous question?c. The US government issues a one-year bond that makessemi-annual coupons with one year maturity and $100 face value.Under the absence of arbitrage assumption, what would be the priceof this bond if:i. Bond A is correctly priced and Bond B is incorrectlypriced?ii. Bond B is correctly priced and Bond A is incorrectlypriced?