Use the following information to answer the remaining questions.

Suppose you observe the following securities. Assume that all of them are priced correctly based on the appropriate spot rates.

• 1-year STRIP with a par value of $100 and a price of $97 (assume annual compounding)
• 2-year STRIP with a par value of $100 and a price of $91 (assume annual compounding)
• Treasury bond priced at par with 3 years left to maturity, a 5% coupon, and a $1000 par value (assume coupons are paid annually)
• Treasury bond priced at par with 4 years left to maturity, a 6% coupon, and a $1000 par value (assume coupons are paid annually)

Calculate the 1-year spot rate.

Calculate the 2-year spot rate.

Calculate the 3-year spot rate.

Calculate the 4-year spot rate.

Suppose you observe a 3-year Treasury bond with a 2% coupon (paid annually) and a $1,000 par value. What is the arbitrage-free price of this bond?

Suppose you observe a 4-year Treasury bond with a 3% coupon (paid annually) and a $1,000 par value. What is the arbitrage-free price of this bond?

Suppose that the bond in question #7 has a yield-to-maturity of 5.50%. If you were to exploit this mispricing opportunity, what would your arbitrage profit be?

Assume that you can invest any amount in STRIPS and that 1-4-year STRIPS are correctly priced based on the spot rates that you have calculated. In order to benefit from the arbitrage opportunity in question #8, how much should you invest in a 1-year STRIP?

Assume that you can invest any amount in STRIPS and that 1-4-year STRIPS are correctly priced based on the spot rates that you have calculated. In order to benefit from the arbitrage opportunity in question #8, how much should you invest in a 2-year STRIP?

Assume that you can invest any amount in STRIPS and that 1-4-year STRIPS are correctly priced based on the spot rates that you have calculated. In order to benefit from the arbitrage opportunity in question #8, how much should you invest in a 3-year STRIP?

Assume that you can invest any amount in STRIPS and that 1-4-year STRIPS are correctly priced based on the spot rates that you have calculated. In order to benefit from the arbitrage opportunity in question #8, how much should you invest in a 4-year STRIP?