1. (40 pts) Consider following bonds where 0.5- and 1-year securities are zero-coupon instruments and others are coupon bonds. (Payments are semi-annual) Maturity (Years) Price Coupon Type Coupon Rate 0.50 94.50 Zero Coupon 0 1.00 89.50 Zero Coupon 0 1.50 105.80 Coupon 9.00 2.00 103.00 Coupon 8.00 2.50 101.00 Coupon 8.50 110.00 Coupon 11.00 3.50 99.00 Coupon 9.00 4.00 93.00 Coupon 8.50 4.50 89.00 Coupon 9.00 5.00 101.00 Coupon 11.00 3.00 Calculate the spot rates (Estimate the term structure using bootstrapping method). 2. (30 pts) Using the spot rates you calculated in question 1: a) Compute the forward rate between years 1 and 3. b) Compute the forward rate between years 3 and 4. c) Suppose one of your clients offers to commit to borrowing money from you between years 3 and year 4 at a rate of 13%. Is there any way you can profit from this? Is this strategy an arbitrage ? 1. (40 pts) Consider following bonds where 0.5- and 1-year securities are zero-coupon instruments and others are coupon bonds. (Payments are semi-annual) Maturity (Years) Price Coupon Type Coupon Rate 0.50 94.50 Zero Coupon 0 1.00 89.50 Zero Coupon 0 1.50 105.80 Coupon 9.00 2.00 103.00 Coupon 8.00 2.50 101.00 Coupon 8.50 110.00 Coupon 11.00 3.50 99.00 Coupon 9.00 4.00 93.00 Coupon 8.50 4.50 89.00 Coupon 9.00 5.00 101.00 Coupon 11.00 3.00 Calculate the spot rates (Estimate the term structure using bootstrapping method). 2. (30 pts) Using the spot rates you calculated in question 1: a) Compute the forward rate between years 1 and 3. b) Compute the forward rate between years 3 and 4. c) Suppose one of your clients offers to commit to borrowing money from you between years 3 and year 4 at a rate of 13%. Is there any way you can profit from this? Is this strategy an arbitrage