You observe the following on-the-run Treasury securities in the market:

1. 6-month Treasury bill yields 5.25% p.a.
2. Two-year Treasury note coupon 6.00% p.a.
3. Five-year Treasury note with coupon 7.5% p.a.

Assume all Treasury securities with maturity over 6-month have par of 100 and pay semi-annually.

1. Using above information to fill in the missing observations in the theoretical spot rate curve below. (10 marks)

Year (Period)	Yield to Maturity (%)	Spot Rate (%)
0.5 (1)	5.25	5.25
1.0 (2)		?
1.5 (3)		?
2.0 (4)	6.00	?
2.5 (5)		?
3.0 (6)		?
3.5 (7)		6.82
4.0 (8)		7.10
4.5 (9)		7.38
5.0 (10)	7.50	7.67

1. A 4% 2-year Treasury note is trading at $95, is there an arbitrage opportunity? If so, what is your arbitrage strategy and what is your expected profit? (6 marks)

1. What is the market consensus of the spot rate after 4.5 years? A 8% 10-year Treasury bond is trading at $96 at the moment. Assume all your coupon income can be reinvested at 8.5% for the next five years. Based on the remaining coupon payments, what will be your holding period return over 5-years on this bond if market interest rate stays constant at the forecasted level after 5 years? (4 marks)