2. Bond Valuation and Arbitrage On September 1st, 2021 you obtained the following market information of Treasury bonds with different maturity. Assume that the coupons are paid semi-annually, and that the face value of all bonds is $100. You can sell/buy at the quoted bid/ask prices. Table 1: Treasury Bond Information Maturity Coupon Rate Bid Ask March 1st, 2022 1.50% 99.7 99.8 September 1st, 2022 2% 99.02 99.08 March 1st, 2023 2% 95.8 95.86 September 1st, 2023 2.50% 92 92.1 (a) Using the average value of the bid and ask price as the fair value, calculate the term structure of spot rate (ro.5, 1, 1.5 and r2). Report you answer in terms of annualized rates, semi-annually compounded. (b) Suppose that you buy a bond that matures on September 1st, 2023. After 6 months, the bond's bid-ask spread becomes 90.95 - 91.05. What is your 6 months holding period return on the bond? Using the bonds in the table above, build a portfolio that replicates the cash-flow of a zero-coupon bond that matures on September 1st, 2022. (d) You found out that the zero-coupon bond with maturity of September 1st, 2022 is currently traded in the market with bid-ask spread 96.05 96.10. Is there arbitrage opportunity? If so, what is the arbitrage profit for each unit of bond traded? Describe the strategy carefully.