Consider a 6% Treasury note with 1.5 years to maturity. Spot rates (EXPRESSED AS SEMIANnUAL YIELDS TO MATURITY) are: 6 months = 5%, 1 year = 6%, 1.5 years = 7%. If the note is selling for $992, compute the arbitrage profit, and explain how a dealer would perform the arbitrage. Now… the part I’m confused about is the explanation. It shows the PV formulas… 30/1.025) + 30/(1.03)^s + 1030/(1.035)^3. What I don’t understand is why are the dividing the given spot rates by two? It already said they are given as semiannual so why are they divided by 2 again?
okay… wow… reading further I just read that bond equivalent yiled (BEY) is also referred to as semiannual YTM or semiannual-pay YTM. If you are given yields that are identified as BEY, you will know that you must divide by two to get the semiannual discount rate. So the question I had was indeed worded as “semiannual yields to maturity”… which is also BEY, which must be divided by two to get the semiannual discount rate. Did I just answer my own question?? (There have been a few times when Schweser has a concept’s explanation a few pages AFTER you would need it to solve an example. I hope they fix that.)