Question 2: Yield Curve You observe the following bonds i

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Question 2: Yield Curve

You observe the following bonds in the market. Assume they are risk-free and have a face value of

$1,000. The market prices are described in the table below:

Bond Market price today Bond type

A 936.885 1-year zero coupon bond

B 879.664 2-year zero coupon bond

C 1,129.932 3-year bond with a coupon of 10%

D 840.629 3-year zero coupon bond

a. Write down the timeline of the cash-flows for each bond. Assume you buy the bonds.

b. What are the yields on the zero-coupon bonds? (Express the answer in percent using 3 digits.

E.g., 7.456%)

c. Is there an arbitrage opportunity? Explain. (Do NOT need to show how to exploit the arbitrage if

it exists)

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