Bond stripping and bond reconstitution offer opportunities for ______,which can occur if the _________ is violated.

Question

Quizplus · Accepted Answer

Bond stripping and bond reconstitution involve separating a bond into its principal and coupon payments and then recombining them into new securities. This process can create arbitrage opportunities, which arise when the law of one price is violated, and an asset trades at different prices in different markets. By exploiting these discrepancies, traders can earn a riskless profit. For example, if a stripped bond's combined value is lower than the sum of its parts, an investor can buy the components and sell the bond at a profit for the difference. Thus, A is the correct choice, and the explanation supports its validity.

Bond Stripping and Bond Reconstitution Offer Opportunities for ______,Which Can