Consider a bond that pays $1000 in one year. Suppose that the market interest ra

Question

Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to: A. $909 to $917 B. $909 to $926 C. $917 to $926 D. $909 to $1000 Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to: A. $909 to $917 B. $909 to $926 C. $917 to $926 D. $909 to $1000 Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to: A. $909 to $917 B. $909 to $926 C. $917 to $926 D. $909 to $1000

Explanation / Answer

Answer:

Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

Value at 8% = 1000 / 1.08 = $926

Value at 10% = 1000 / 1.10 = $909

So range is 909 to 926

$909 to $926

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