Consider the prices of the following zero-coupon bonds, each of which has a face value of 1000.

Maturity (half-years) | Price

1 | 968.5

2 | 929

3 | 915.2

4 | 906

a. Compute the (annualized) spot rates r_0,0.5, r_0,1.0, r_0,1.5, r_0,2 implied by the prices given above.

b. Use the spot rates obtained above to price a coupon bond with maturity 2 years (4 semiannual periods), annual coupon rate of 7%, face value of 1000, and making semi-annual coupon payments. Is the bond selling at a premium or discount?

c. Explain in detail how one could formulate a strategy to profit if the above coupon bond were selling for par