Brainteaser iconBrainteaser - Bond Arbitrage

Bond Arbitrage
Finance
J.P. Morgan
A risk-free bond yields 5% per annum, while the bank offers a 3% annual interest rate. You may borrow or lend at the bank rate and buy or short-sell the bond. Assuming a notional amount of $100 and no transaction costs, determine whether an arbitrage opportunity exists, and if so, calculate the arbitrage profit after one year.