Question

There are two market-based notes maturing on April 30, 2021.

Note #1: coupon= 0.0225, buy price = 101.78125, sell price = 101.0625

Note #2: coupon = 0.0125, buy price = 100.578125, sell price = 100.5625.

Is there an arbitrage opportunity in the two notes? Why or why not?

Answer 1

Assuming current date as April 30, 2020, so term is 1 year

Now, for Note 1, Buy Price - Sell Price = 0.71875

interest accrude = price difference - coupon = 0.71875-0.0225 = 0.69625

for Note 2, Buy Price - Sell Price = 100.578125-100.5626 = 0.015525

interest accrude = price difference - coupon = 0.015525 - 0.0125 = 0.003025

Since, there is huge difference in price differences of two notes, there is an arbitrage opportunity.