Question 1: What spot and forward rates are embedded in the following treasury bonds? The price of one-year (zero coupon) treasury bills is 93.46 percent. Assume for simplicity that bonds make one annual payment. Hint: Can you devise a mixture of long and short positions in these bonds that gives a cash payoff only in year 2? In year 3?
Coupon (%) Maturity (years) price (%)
4 2 94.92
8 3 103.64
Question 2: A three-year bond witha 4 percent coupon is selling at 95.00 percent. Is there a profit opportunity here? If so, how would you take advantage of it?