Problem 6. No arbitrage price of coupon bond. We consider now a market where 4 bonds exist, namely A,B,C,D. Their cashflows are represented in the following table (the unit of time is one year): 1. (4 pts) Please construct an arbitrage in this market. 2. (1 pts) In order to eliminate the arbitrage opportunity in (1), what should be the price of A ? 3. (2 pts) We saw in class that the arbitrage price of A at time zero should be of the following form: P(A)=i=1n(1+z(0,ti))tiFi Explain each term in this formula. 4. (3 pts) Draw the zero-coupon yield curve (the curve describes z(0,ti) as a function of ti) given by B,C,D (by using linear interpolation). (keep three significant figures) 5. (2 pts) Estimate the value of z(0,2.5)(z as defined in question (3)). (keep four significant figures) 6. (2 pts) Find the price (at t=0 ) of a zero-coupon of 2.5 years maturity. (keep three significant figures) Problem 6. No arbitrage price of coupon bond. We consider now a market where 4 bonds exist, namely A,B,C,D. Their cashflows are represented in the following table (the unit of time is one year): 1. (4 pts) Please construct an arbitrage in this market. 2. (1 pts) In order to eliminate the arbitrage opportunity in (1), what should be the price of A ? 3. (2 pts) We saw in class that the arbitrage price of A at time zero should be of the following form: P(A)=i=1n(1+z(0,ti))tiFi Explain each term in this formula. 4. (3 pts) Draw the zero-coupon yield curve (the curve describes z(0,ti) as a function of ti) given by B,C,D (by using linear interpolation). (keep three significant figures) 5. (2 pts) Estimate the value of z(0,2.5)(z as defined in question (3)). (keep four significant figures) 6. (2 pts) Find the price (at t=0 ) of a zero-coupon of 2.5 years maturity. (keep three significant figures)