FIxed income Arbitrage is to find mispricing of coupon bonds through the system of linear equations where # of equations > # of unknowns. Suppose there are only three treasury coupon bonds on the market today:

Bond A: 2-year 2% treasury coupon bond, trading today at price $937.

Bond B: 2-year 3% treasury coupon bond, trading today at price $970.

Bond C: 2-year 4% treasury coupon bond, trading today at price $974.

Let P(0,1) and P(0,2) be the two unknowns, where P(0.1) denotes the price today of a 1-year STRIPS, and P(0,2) the price today of a 2-year STRIPS. Face value of STRIPS is $1.

1) SInce each coupon bond is essentially a portfolio of STRIPS, write the 2-equation 2-uknown system.

2) Following 1, usually how many pairs of solutions to the 2 unknowns can you solve for?

3) If the market price of STRIPS are P(0,1) = 0.95 and P(0.2) = 0.9, is there arbitrage opportunities in any of the coupon bonds, in which one(s)?