1. (All units in US \$.) We denote by P(t,T) the time-t price of a bond maturing at T>t. Today (t=0), an investor trades two bonds, one maturing in twelve months having price P(0,1)=95, and paying 2% coupons, semi-annually (we call this one a T1-bond). The T2-bond matures in two years, and pays 1% coupons, semi-annually (price P(0,2)=90. Each of the bonds has a face value of 100 . The investor decides to purchase a hundred T2-bonds and sell T1-bonds. (a) Compute the amount in the bond portfolio so to off-set coupon payments of both bonds within the first year. (b) Compute and illustrate the cash-flows of this bond portfolio until T2=2. (c) Compare this bond portfolio with a forward rate agreement contracted today, so to pay 5000$ at T1 for receiving $N at T2. (Please compare the costs of these agreements, as well as their semi-annual cash-flows up to 2 years. You do not need to know the exact value of N, which is close to 5000 , but cannot be computed exactly without knowing the zero rates.) 1. (All units in US \$.) We denote by P(t,T) the time-t price of a bond maturing at T>t. Today (t=0), an investor trades two bonds, one maturing in twelve months having price P(0,1)=95, and paying 2% coupons, semi-annually (we call this one a T1-bond). The T2-bond matures in two years, and pays 1% coupons, semi-annually (price P(0,2)=90. Each of the bonds has a face value of 100 . The investor decides to purchase a hundred T2-bonds and sell T1-bonds. (a) Compute the amount in the bond portfolio so to off-set coupon payments of both bonds within the first year. (b) Compute and illustrate the cash-flows of this bond portfolio until T2=2. (c) Compare this bond portfolio with a forward rate agreement contracted today, so to pay 5000$ at T1 for receiving $N at T2. (Please compare the costs of these agreements, as well as their semi-annual cash-flows up to 2 years. You do not need to know the exact value of N, which is close to 5000 , but cannot be computed exactly without knowing the zero rates.)