An investor owns bond #1 that has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in:

Question

Quizplus · Accepted Answer

The investor is engaging in arbitrage, which is the act of taking advantage of price differences between two similar assets for profit. By selling bond #1 and buying bond #2 with a higher return, they are attempting to earn a risk-free profit.

An Investor Owns Bond #1 That Has a Rate of Return