4. Consider the following four default-free bonds traded in the market. All bonds mature at or before the end of year 4. Their prices and cash flows at the end of each year are the following: (20 points) A Bond B 0 D 10 0 10 10 20 30 CF Year CF Year CF Year CF Year Fair Price 1 2 3 4 0 10 10 110 127.2 0 0 30 10 10 18.8 55.8 27.8 (a) What is the fair price and yield to maturity (annual compounding) of a new Bond E that matures at the end of year 4 and provides cash flows of 30, 30, 30, and 130 (i.e. $100 FV and 30% coupon rate) on years 1 through 4, respectively? (b) A new Bond F will be launched in the market. It will provide a yield to maturity of 2.5% (annual compounding) and cash flows of 200, 200, 400, and 1500 at the end of years 1 through 4, respectively. Is there an arbitrage opportunity? If so, work out an investment strategy to lock in an arbitrage profit today with no future net cash flows. 4. Consider the following four default-free bonds traded in the market. All bonds mature at or before the end of year 4. Their prices and cash flows at the end of each year are the following: (20 points) A Bond B 0 D 10 0 10 10 20 30 CF Year CF Year CF Year CF Year Fair Price 1 2 3 4 0 10 10 110 127.2 0 0 30 10 10 18.8 55.8 27.8 (a) What is the fair price and yield to maturity (annual compounding) of a new Bond E that matures at the end of year 4 and provides cash flows of 30, 30, 30, and 130 (i.e. $100 FV and 30% coupon rate) on years 1 through 4, respectively? (b) A new Bond F will be launched in the market. It will provide a yield to maturity of 2.5% (annual compounding) and cash flows of 200, 200, 400, and 1500 at the end of years 1 through 4, respectively. Is there an arbitrage opportunity? If so, work out an investment strategy to lock in an arbitrage profit today with no future net cash flows