2. Assume zero-coupon yields (spot rates) on Treasury securities are as summarized in the following table: Maturity (years) Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.80% You want to buy a five-year maturity, Treasury note with annual coupon rate of 3% and a face value of $1000. Coupons are paid annually. (1) If the law of one price holds, what should be the yield to maturity of this bond? (2) If the market price of this bond is $990, is there any arbitrage opportunity? If there is any arbitrage opportunity, explain the steps for your transactions. 3. Suppose a client observes the following nominal spreads for two corporate bonds: Bond issued by Ford Motors (rated A-): 150 basis points Bond issued by General Motors (rated BBB): 135 basis points Your client is confused because he/she thought the lower-rated bond (GM Bond) should offer a higher nominal spread than the higher-rated bond (Ford Bond) due to greater credit risk of the GM Bond. Explain possible reasons why the nominal spread is lower for the GM Bond. Assume that the two bonds have the same maturity. 2. Assume zero-coupon yields (spot rates) on Treasury securities are as summarized in the following table: Maturity (years) Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.80% You want to buy a five-year maturity, Treasury note with annual coupon rate of 3% and a face value of $1000. Coupons are paid annually. (1) If the law of one price holds, what should be the yield to maturity of this bond? (2) If the market price of this bond is $990, is there any arbitrage opportunity? If there is any arbitrage opportunity, explain the steps for your transactions. 3. Suppose a client observes the following nominal spreads for two corporate bonds: Bond issued by Ford Motors (rated A-): 150 basis points Bond issued by General Motors (rated BBB): 135 basis points Your client is confused because he/she thought the lower-rated bond (GM Bond) should offer a higher nominal spread than the higher-rated bond (Ford Bond) due to greater credit risk of the GM Bond. Explain possible reasons why the nominal spread is lower for the GM Bond. Assume that the two bonds have the same maturity