Consider the following three zero coupon bonds currently traded in the market:

Bond A: a 1-year zero-coupon bond with a yield of 2%

Bond B: a 3-year zero-coupon bond with a yield of 5%

Bond C: a 2-year zero-coupon bond to be delivered in one year with a yield of 3%

Based on the above information provided, there is an arbitrage opportunity under the following two assumptions:

1. There is no transaction costs, no bid-ask spread, and no other market frictions.
2. You are able to buy or sell short any face amount of the above bonds as desired.

Fill in the blanks to complete the trading strategy as we discussed in class. You would pay $1 to buy $_____ face amount of Bond B, sell short $____ face amount of Bond A, and sell short $_____ amount of Bond C. By following the strategy, you pay nothing today (zero-investment), you have no liability in the future, and the arbitrage profit is $______ that you will receive at the end of year 3.

Fill in the blanks.

Note:

• Retain two decimal places for each blank.
• All yields provided are annualized yields compounded semiannually.
• Type your results with no spaces.