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Table 1: U.S. Treasury Rates Duration Interest Rate 0.13% 0.16% 0.18% 0.31% 0.52% 0.74% 1.29% 1.52% 1 year 2 year 3 year 5 year 7

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Table 1: U.S. Treasury Rates Duration Interest Rate 0.13% 0.16% 0.18% 0.31% 0.52% 0.74% 1.29% 1.52% 1 year 2 year 3 year 5 year 7 year 10 year 20 year 30 year (a) Based on the above yield curve data, what should the market price of a risk-free, 3-year, 2% coupon bond be per $1,000 of face value? Assume that coupon payments are made annually. [8 points) (b) Suppose the above bond was trading for $1,060.00 per $1,000 of face value. Show how you could make an arbitrage profit. [8 points)

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