1) You have identified a pure bond arbitrage strategy: bond C is overvalued and the replicating portfolio is undervalued. You present your findings to your team. Your boss is worried that the trading strategy involves short-selling bond C which might expose the firm tofuture cash-outflows. Explain to your boss why the strategy will yield a risk-free profit.

2) A colleague has identified a long-short bond arbitrage trading strategy with two corporate bonds that are identical in every respect except that they are issued bytwo different companies. Explain to your colleague why the strategy is not "risk-free" as we would expect from an arbitrage trading strategy.

3) Many attributes the housing bubble of 2006 (which ultimately led to the financial crisis) to the fact that the U.S. Federal reserve maintained historically low interest rates in years leading up to the bubble. Explain how low rates can fuel house prices.