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We observe the following two treasury securities with a par value of $1000 with semiannual coupon payments:
Bond Maturity (years) annual YTM Annual Coupon Rate Par
A 0.5 2% 0% $1000
B 1 9.80% 10% $1000
Note that bond A is a zero coupon bond and Bond B is a coupon bond.The par value is $1000 for both bonds
1. Calculate the price of each bond
2. Use bonds A and B to construct 6-month and 12-month spot rates
3. What is the forward rate over the second 6-month period?
4. Bond C is a 1-year zero coupon bond with $1000 par value. The market price of Bond C is $930. Is there an arbitrage opportunity? If yes, construct an arbitrage portfolio.
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