Bond prices in the absence of arbitrage Consider a market with two risk-free zero-coupon bonds, A and B. Their respective maturities are 1 and 2 years, and their market prices are 97.0874 and 95.1814 (expressed as percentage of the face value). (a) Calculate the discount rates r_t for t = 1 and 2 years. (b) Suppose that a two-year bond C, with a coupon rate of 2.75%, also trades in the market. What should be its price if there is no arbitrage? (c) What is the yield to maturity of bond C? (d) If the market price of bond C is 100, is there an arbitrage opportunity? If yes, propose an arbitrage strategy and calculate the arbitrage profit. (e) Calculate the implied forward rate between years one and two, f_1;2 . (f) According to the Pure-Expectations Theory, what are the investors views about the one-year rate r₁ one year from now?