You are given the following information: at t = 0: the price of a 10 year zero

coupon bond with FV = $5,000 is $3,500; f3,12 = 6%. A bank is offering the

following product: for every $1 that you give the bank at t = 10, the bank will

give you back $1.5 at t = 15, or for every $1 that you borrow from the bank

at t = 10, you will have to pay back $1.5 at t = 15.

a)

Write down one equation where the only unknown is r0,3. You do not

need to solve the equation.

b)

b) Suppose r0,3 were 1% less than your answer to part a. Call this new

value r'0,3 Describe how you would construct an arbitrage where at t

= 0 you are simultaneously receiving and investing $1. For each rate,

you must specify whether you are using it to borrow or lend, and how

much (the "how much" can be expressed as a function of r'0,3). For

the bond, you must specify whether you are going long or short, and

how many units. For the contract, you must specify whether you are

using it to invest or borrow, and how much