The yield to maturity (YTM) on 1-year zero-coupon bonds is 8% and the YTM on 2-year zeros is 9%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 11% (paid annually) is 8.5%.
Required:
a. What arbitrage opportunity is available for an investment banking firm?
b. What is the profit on the activity?
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