Suppose the price of the two-year pure discount bond with a $2,500 face value is only $1,900. Is there an arbitrage opportunity? Is yes, how would you structure a trade that has zero cash-flow in years 1 and 2 and a positive cash-flow only in year 0 (i.e. now).

(a) What must the price of a two-year pure discount bond with a $2,500 face value be in order to avoid arbitrage?

(b) Suppose the price of the two-year pure discount bond with a $2,500 face value is only $1,900. Is there an arbitrage opportunity? Is yes, how would you structure a trade that has zero cash-flow in years 1 and 2 and a positive cash-flow only in year 0 (i.e. now).