Practice Question Set: Pricing Conventions, Discounting, and Arbitrage

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Chapter 9. Pricing Conventions, Discounting, and Arbitrage Practice Question set contains 25 pages covering the following learning objectives:
* Define discount factor and use a discount function to compute present and future values.

* Define the “law of one price,” explain it using an arbitrage argument, and describe how it can be applied to bond pricing.

* Identify arbitrage opportunities for fixed income securities with certain cash flows.

* Identify the components of a US Treasury coupon bond, and compare the structure to Treasury STRIPS, including the difference between P-STRIPS and C-STRIPS.

* Construct a replicating portfolio using multiple fixed income securities to match the cash flows of a given fixed-income security.

* Differentiate between “clean” and “dirty” bond pricing and explain the implications of accrued interest with respect to bond pricing.

* Describe the common day-count conventions used in bond pricing.

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