Session 3                    Bond Arbitrage and T-Bills

(Friday, November 5)

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Pre  Preparatory Readings:

Re-read CP-2, Fabozzi, pp. 130-131

CP-3, Livingston, Chapter 8 (pp. 121-128)

·         Spot Rates

·         Bonds as the sum of the PV of well-defined CFs

·         Pricing a Treasury Coupon Bond with Treasury Strips

·         Coupon stripping and Arbitrage between Bonds and Strips

·         Treasury Bills vs. Treasury Bonds     

·         Treasury Bills:  A special pricing convention

Homework 3