You can buy or sell the following default-free bonds. All bonds mature at

Year 3. Their prices today and cash

ows at the end of each year are the following:

Bond Price CF Year 1 CF Year 2 CF Year 3

A 94 4 4 104

B 100 6 6 106

C 112 12 12 112

Given these prices, you realize that yoiu can take a position to lock in an arbitrage

prot of $6 today with no future net cash Flows. What is your investment strategy that

guarantees this arbitrage profit?

2. There are four default-free bonds on the market. All bonds mature at or

before the end of Year 3. Their prices today and cash Flows at the end of each year are

the following:

Bond Price CF Year 1 CF Year 2 CF Year 3

A 124.67 15 20 125

B 99.89 5 10 115

C 100.12 7 107

D 95.23 100

Is there an arbitrage opportunity? If yes, state your investment strategy.