1.

(Use money market yields for discounting) A bond with no coupons sells today for $66, but will pay $75 in two years (its face value). If the one-year risk free interest rate is 10%,

a) At what price should the bond be trading?

2.

(Use money market yields for discounting) A bond with no coupons sells today for $66, but will pay $75 in two years (its face value). If the one-year risk free interest rate is 10%, is arbitrage possible? (if yes, do you short or long the bond? explain)

3.

(Use money market yields for discounting) A bond with no coupons sells today for $66, but will pay $75 in two years (its face value). If the one-year risk free interest rate is 3%,

a) At what price should the bond be trading?

4.

(Use money market yields for discounting) A bond with no coupons sells today for $66, but will pay $75 in two years (its face value). If the one-year risk free interest rate is 3%, is arbitrage possible? (if yes, do you short or long the bond? explain)

5.

An investor receives $500 in three years in return for an investment of $400 now. Calculate the percentage return per annum with a) annual compounding, b) semiannual compounding, c) continuous compounding, and d) the return as defined by the money-market yield.

(show the formula you use to find the answer)