- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 33. The Arbitrage-Free Valuation Framework
- Subject 1. The Meaning of Arbitrage-Free Valuation
CFA Practice Question
Given the following spot rates:
The arbitrage-free value of a 3-year, 10% Treasury issue would be closet to:
A. 94.60
B. 95.16
C. All on-the-run Treasuries equal 100.
Explanation: Arbitrage-free value = 5/(1.05)1 + 5/(1.052)2 + 5/(1.054115)3 + 5/(1.056174)4 + 5/(1.058303)5 + 105/(1.060453)6= 95.16
User Contributed Comments 13
| User | Comment |
|---|---|
| Ebenezer | You can make a profit by buying the bond and selling the coupon payments for a profit. |
| kulla | I think this question will take like 3 minutes to solve even if we use calculator. |
| Check | You can also make a profit by selling the coupon strips and add your exam preparation material as a give-away. |
| panos | another way to make a profit is to keep the money instead of taking the exams |
| Tomas | Taking the cost for the exam & prep. materials and discounting it at prevailing market rates presents a nice savings potential = profit... |
| octavianus | buy individual coupon strips for a total of 93.48 combine strips sell bond for 100 |
| tonytough | to make profit short sell treasury to get proceeds of 100, buy back reconstituted strips at 95.16 and give back to broker, net profieof 4.83. this qn will take minimum of 2.5 min, however principal may be set in final for less req time. we must risk the enroll fees to get hoped return in april, pass or fail, otherwise we still fail |
| steved333 | Don't forget to add the $100 face value to the last period's cash flow |
| soukhov | PV = FV / (1+i)^n |
| maria15 | Where did the 5 in the numerator come from? |
| tweety87 | it's half of the 10% (semiannual) |
| janis36 | panos is making a good point. |
| surin1996 | Hi, can someone explain what octavianus said or what tonytough sai please? |