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You are looking at the Brazilian Bond Market that has the following yield curve in...

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Finance

You are looking at the Brazilian Bond Market that has the following yield curve in Table: (Use the following table to solve the questions)

image

a) There is a 4-year maturity bond, with a par value of 1,000 and that has an 5.2% coupon. Please calculate the price of the replicating portfolio of zero coupon bonds.

b) A broker quoted the bond at 93 (or 930 per bond); can you think a possible arbitrage? If so, please detail the arbitrage.

c) If another broker offers you the same previous bond but at 97.5. Is there a possible arbitrage? If so, please detail the arbitrage.

Table: Yield Curve for Brazilian Zero-Coupon Bonds Time to 1 year 2 year 3 year 4 year 5 year YTM 4.39% 6.23% 6.50% 7.00% 7.25%

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