Question 2. The yield to maturity on a 3 year coupon bonds is 3%, with coupon rate 3% paying coupon annually. Face value is 1000. The term structure is as follows: y1 =2% , y2 =3%, y3 =4%. Which of the following statement is correct? Please show your work

A. There exist an arbitrage opportunity. To exploit it, you should sell the 3 year coupon bond and buy a portfolio of 1-year, 2-year, and 3-year to maturity STRIPS.

B. The coupon rate is equal to the yield to maturity, so there is no arbitrage opportunity.

C. There exist an arbitrage opportunity. To exploit it, you should sell the 3 year coupon bond and also sell a portfolio of 1-year, 2-year, and 3-year to maturity STRIPS.