Assume that the market risk-free interest rate is 12.00%. Assume that a zero-coupon risk free bond, with maturity 2 years and 100 face value, is trading at 75. Which of the following is true?

(a) By lending today for two years at the market rate, and short-selling the bond, you have an arbitrage.

(b) By borrowing today for two years at the market rate, and buying the bond, you have an arbitrage. (c) By buying the bond today and investing the proceeds forward after two years, you have an arbitrage.

(d) There is no arbitrage opportunity.

(e) I choose not to answer.

I would love an explanation to this. As I know the correct answer, but does not understand. :)