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

Questions:

1) Since each coupon bond is essentially a portfolio of STRIPS, write the 3-equation 2-unknown system.

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

3) If market price of STRIPS are: 0,1 = 0.95 and 0,2 = 0.9, is there arbitrage opportunities in any of the coupon bonds, in which one(s)?