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  3. hint: you are able to borrow money from the bank,

Hint: you are able to borrow money from the bank, or deposit money into the...

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Finance

imageHint: you are able to borrow money from the bank, or deposit money into the bank, at the risk-free rate of interest. After one year you will pay back your loan plus interest, or receive your savings plus interest.

2) A bond promises a risk-free payment of $1000 in one year. The risk-free rate of interest is 2.64%. a) What is the price of the bond? (1 mark) b) If the price of the bond is actually $960, what is the arbitrage strategy? Illustrate all cash flows today and one year from today. (2 marks) c) If the price of the bond is actually $990, what is the arbitrage strategy? Illustrate all cash flows today and one year from today. (2 marks)

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