Suppose a Two-Year Treasury Note Is Trading at Its Par

question 4

Multiple Choice

Suppose a two-year Treasury note is trading at its par value of $1,000.You examine the cash flows and discover that if you sell them individually in the market,you get $46.23 for the six-month coupon,$44.67 for the one-year coupon,$42.21 for the eighteen-month coupon,$40.22 for the two-year coupon,and $831.56 for the principal.The amount of arbitrage profit you can make by trading each security is:

• A) $2.58
• B) $4.89
• C) $10.34
• D) $41.78
• E) None of these answers are correct.

Recognize and differentiate between capital budgeting methods that consider and do not consider the time value of money.

Understand the definition and role of relevant costs in decision-making.

Identify and differentiate between types of costs and their relevance to managerial decisions.

Elucidate on the importance of forecasting future cash outlays in the context of relevant costs.

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Definitions:

Startled

The act of experiencing a sudden, involuntary reaction to an unexpected event or stimulus, often involving physical movement.

Classical Conditioning

A learning process that occurs when two stimuli are repeatedly paired; a response which is at first elicited by the second stimulus is eventually elicited by the first stimulus alone.

Instrumental Conditioning

A learning process in which behavior is modified by the consequences of the behavior, through reinforcement or punishment.

CR and US

denote Conditioned Response and Unconditioned Stimulus respectively; terms used in classical conditioning to describe learned responses and natural triggers.