1. Using exhibit 5.6 of Fabozzi, consider you buy the 5-year bond that is selling at par with coupon and yield of 7.10 percent, where the coupon is paid twice a year. How much is the arbitrage profit if you sell all coupons and principal as a portfolio of zeros using the yields in the exhibit from half year all the way to 5 years. Upload your analysis in a word document to dropbox on or before the due date.

2. Consider a portfolio of three bonds all selling at par with the following coupon and yield.

maturitycoupon/yieldPar/Price

15%10 M

25.5%12 M

36%18 M

A. Estimate from the three-year price, the forward rate 1f2 and2f3 using the following algorithm.

B. Reprice the portfolioof the three bonds using the followingalgorithm.

P=100= C1/(1+y)^1 +C2/(1+y)(1+1f2)+C2+100/(1+y)(1+1f2)(1+2f3)

Where

C1 is the 1-year coupon on the portfolioof the three bonds pluspar for the 1-year bond par

C2 is the 2-year coupon on the portfolioof the 2 and 3 years bonds pluspar for the 2-year bond par

C3 is the 1-year coupon on the 3-year-bond pluspar for the 3-year bond par