1. Given the following spot rates on 1-year to 4-year zero coupon bonds: Year Spot Rate 1 8.0% 2 8.5% 3 9.0% 4 9.5%

a. What is the equilibrium price of a four-year, 9% coupon bond paying a principal of $100 at maturity and coupons annually?

b. If the market prices the four-year bond such that it yields 10%, what is the bonds market price?

c. What would arbitrageurs do given the prices you determined in (a) and (b)? What impact would their actions have on the market price?