a. Suppose that ro(1, 2) = 6.8%. Show how buying the 2-year zero-coupon bond and borrowing at the 1-year rate and implied forward rate of 6.8% would earn you an arbitrage profit.

b. Suppose that ro(1,2) = 7.2%. Show how borrowing the 2-year zero- coupon bond and lending at the 1-year rate and implied forward rate of 7.2% would earn you an arbitrage profit.

 LO.1