Bonds A, B and C are all default-free government bonds. Information about their face value, maturity, coupon rate and current price is listed in the table below.

Bond B makes annual coupon payments.

(a) If all three bonds are fairly priced, what are the one-year, two-year and three-year spot rates?

(b) A fourth bond, Bond D, is a default-free coupon bond with a face value of 1,000 and three years remaining till maturity. It makes annual coupon payments at the rate of 3% per year. If the current price of Bond D is 995.76, is there any arbitrage opportunity in the bond market? Explain why or why not.

5. Bonds A, B and C are all default-free government bonds. Information about their face value, maturity, coupon rate and current price is listed in the table below. Maturity Bond A Coupon rate 0% Face value 100 100 100 Current price 96.90 99.00 88.55 1 year 2 years 3 years B 2.75% 0% Bond B makes annual coupon payments. (a) If all three bonds are fairly priced, what are the one-year, two-year and three-year spot rates? (10%) (b) A fourth bond, Bond D, is a default-free coupon bond with a face value of 1,000 and three years remaining till maturity. It makes annual coupon payments at the rate of 3% per year. If the current price of Bond D is 995.76, is there any arbitrage opportunity in the bond market? Explain why or why not. (10%)