2. You bump into your friend Jeffrey Talpins, a bond trader in Wall Street. Today, Jeffrey is buying and selling the following US bonds: Bond Coupon rate (%) Maturity YTM(%) 0 5.00 B 4.50 4.93 6.59 4.41 1 year 2 years 2 years Coupon payments are annual, and bid-ask spreads are zero (i.e., no transaction cost). (a) What are the prices of the above bonds? (b) Is it possible to construct an arbitrage (and get a free lunch!), given the bond prices? If so, what is the trading strategy that produces the arbitrage? Hint: Given the prices of bonds A and B, determine whether the bond C is over- or under-priced. 2. You bump into your friend Jeffrey Talpins, a bond trader in Wall Street. Today, Jeffrey is buying and selling the following US bonds: Bond Coupon rate (%) Maturity YTM(%) 0 5.00 B 4.50 4.93 6.59 4.41 1 year 2 years 2 years Coupon payments are annual, and bid-ask spreads are zero (i.e., no transaction cost). (a) What are the prices of the above bonds? (b) Is it possible to construct an arbitrage (and get a free lunch!), given the bond prices? If so, what is the trading strategy that produces the arbitrage? Hint: Given the prices of bonds A and B, determine whether the bond C is over- or under-priced