6. Fixed Income Arbitrage is to find mispricing of coupon bonds through the system of linear equations where # of equations # of unknowns. Suppose there are only three treasury coupon bonds on the market today: Bond A: 2-year 3% treasury coupon bond, trading today at price $1,007.9 Bond B: 2-year 4% treasury coupon bond, trading today at price $1,027.2 Bond C: 2-year 5% treasury coupon bond, trading today at price $1,050.8 2 be the two unknowns, where Po.1 denotes the price today of a 1-year STRIPS, and Po2 the price Let Po1 and Poz today of a 2-year STRIPS. Face value of STRIPS is $1 1)Since each coupon bond is essentially a portfolio of STRIPS, write the 3-equation 2-unknown system. 2) Usually how many pairs of solutions to the 2 unknowns can you solve for this 3-equation 2-unknown system 3) Focusing on ONLY Bond A and Bond B, will this 2-equation 2-unknown system have solutions? Solve them if yes. 4) Interpret the values you solve for Po.1 and Po2: Suppose they are indeed the correct market value today, what can you say about arbitrage profit in any of three coupon bonds, in which one(s), how much? 0,1