标题: Question on Arbitragefree Valuation and Spot Rates [打印本页] 作者: hanvinh 时间: 2013-4-3 07:24 标题: Question on Arbitragefree Valuation and Spot Rates
Consider a 6% Treasury note with 1.5 years to maturity. Spot rates (EXPRESSED AS SEMIANnUAL YIELDS TO MATURITY) are: 6 months = 5%, 1 year = 6%, 1.5 years = 7%. If the note is selling for $992, compute the arbitrage profit, and explain how a dealer would perform the arbitrage.
Now… the part I’m confused about is the explanation. It shows the PV formulas… 30/1.025) + 30/(1.03)^s + 1030/(1.035)^3.
What I don’t understand is why are the dividing the given spot rates by two? It already said they are given as semiannual so why are they divided by 2 again?作者: mfleming1983 时间: 2013-4-3 07:29
okay… wow… reading further I just read that bond equivalent yiled (BEY) is also referred to as semiannual YTM or semiannualpay YTM. If you are given yields that are identified as BEY, you will know that you must divide by two to get the semiannual discount rate.
So the question I had was indeed worded as “semiannual yields to maturity”… which is also BEY, which must be divided by two to get the semiannual discount rate.
Did I just answer my own question??
(There have been a few times when Schweser has a concept’s explanation a few pages AFTER you would need it to solve an example. I hope they fix that.)
