Illya Gerasymchuk
Entrepreneur / Engineer
what would happen if the bank issued bonds with a semi-annual coupon instead?
semi-anual coupon means that bondholders get 2 ≈1.5% interest payments in the year: at 6 months, and maturity
remember: the UST bond only has one payment - at maturity in 1 year (think zero-coupon)
assume that both start simultaneously and mature in 1 year without any periodic payments
this means that today the bank borrows $100M at 3% APY and invests it at 4%
in exactly 1 year the bank receives $104M from the UST bond, repays $103M to bondholders and keeps $1M profit