You have data on prices of two level-coupon bonds. Both of them have two years to maturity, face value of $1,000 and pay annual coupons. The first bond pays a 5% coupon and sells for $1,000.92, and the second one pays a 1% coupon and sells for $925.81. You also know that the price of a three-year zero-coupon bond with face value of $1,000 is $816.30.

Required

(a) Using any approach you want, determine the term structure of the spot interest rates and the term structure of the forward rates.
(b) Suppose that a bank offers you a forward rate of f₃ = 9%. If there is an arbitrage opportunity, describe how you would take advantage of it