What actions force a Treasury's bond price to be valued in the market at the present value of the cash flows discounted at the Treasury spot rates?
What will be an ideal response?
The price of a Treasury security should be equal to the present value of its cash flow where each cash flow is discounted at the theoretical spot rates. If this does not occur then an arbitrage situation develops where a large profit can be made with no risk involved. Thus, arbitrage forces a Treasury to be priced based on spot rates and not the yield curve. The ability of dealers to purchase securities and create value by stripping forces Treasury securities to be priced based on the theoretical spot rates.
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Indicate whether the statement is true or false
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Indicate whether the statement is true or false.
If the December HDD contract for Chicago is quoted as 994, what is the implied average HDD for the month of December?
A) 26 B) 32 C) 49 D) 65