Given par rates (or yield-to-maturity) of an institutions bonds for 1-year is 2%, 2-year is 3% and 3-year is 4%.

(a) find the 1-year, 2-year, 3-year spot rates. Use these spot rates to price a fixed rate 3-year

5% coupon bond issued by the same institution.

(b) Suppose interest rate volatility is incorrectly perceived by the market as 15% p.a. when it

should be 20% p.a., can you make arbitrage profits by trading in these institutions bonds

?

(c) Suppose on top of information given above, you also know that next years 1-year spot

rate will likely be below 4%, can you make arbitrage profits? How?

There's no more additional information to this question. I don't know how to solve part b & c.