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No 2. You are given the following information about four bonds: Bond Price Time to maturity (years) Coupon rate 10% 10% 8% 99 96 97

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No 2. You are given the following information about four bonds: Bond Price Time to maturity (years) Coupon rate 10% 10% 8% 99 96 97 7% a) Find the spot rates in the given market. State all necessary assumptions. (10 marks) b) Estimate the expected spot rate for a two year investment that will be made in the end of the second year. (5 marks) c) Suppose bond N is currently traded at the market at a price of 95. Bond N has a coupon rate of 9% and 3 years to maturity. Are there any arbitrage opportunities? If yes, provide a detailed strategy to obtain an arbitrage profit. (15 marks) d) Find the yield to maturity of bond N directly and using approximation. What is the intuition behind the approximation formula? Are there any limitations of the approximation formula? (15 marks) e) Describe and explain different option-like characteristics of bonds. How do they affect bond prices? (5 marks) No 2. You are given the following information about four bonds: Bond Price Time to maturity (years) Coupon rate 10% 10% 8% 99 96 97 7% a) Find the spot rates in the given market. State all necessary assumptions. (10 marks) b) Estimate the expected spot rate for a two year investment that will be made in the end of the second year. (5 marks) c) Suppose bond N is currently traded at the market at a price of 95. Bond N has a coupon rate of 9% and 3 years to maturity. Are there any arbitrage opportunities? If yes, provide a detailed strategy to obtain an arbitrage profit. (15 marks) d) Find the yield to maturity of bond N directly and using approximation. What is the intuition behind the approximation formula? Are there any limitations of the approximation formula? (15 marks) e) Describe and explain different option-like characteristics of bonds. How do they affect bond prices

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