a. Will you be buying, selling, or not trading the 2.50 year zero coupon bonds?

b. What quantity of the 2.50 year zero coupon bonds will you be trading? Enter your answer as a positive value (even if you are selling) or enter zero if you are not trading 2.50 year zeros at all.

c. Will you be buying, selling, or not trading the 4 year, 10% semi-annual coupon bonds?

d. What quantity of the 4 year, 10% semi-annual coupon bonds will you be trading? Enter your answer as a positive value (even if you are selling), or enter zero if you are not trading these bonds at all.

e. How many of the 4 year zero coupon bonds will you be trading? Enter your answer as a positive value (even if you are selling), or enter zero if you are not trading these bonds at all.

f. How many bonds in total will you be trading?

g. What is the overall arbitrage profit earned from your trades?

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Lyou can trade in order to earn an immediate arbitrage profit. I have provided a table below to aid you in constructing your trades. Hint: Notice that the actual price of the 4 year coupon bond is $1055 (=105:16) whereas, if it agreed with the yield curve, it would be (should be) selling for $1155 (=115:16) (also known as the no arbitrage price). In any arbitrage trade (which is always driven by a mis-pricing), you want to buy low (i.e. buy the coupon bond at the lower value of $1055) and sell high (i.e. sell the equivalent of the coupon bond at a higher value of $1155 - via replicating it with zeros, and then selling the zeros). i.e. you'll want to buy the 4 year coupon bonds cheaply, and then break them up and sell them as a portfolio of zeros - for a higher price than you paid for the coupon bonds). For more specific insights, and a numerical example, review the no-arbitrage example in the section titled "The Relation Between Coupon Bonds and Zeros" - and focus on the trades used there to earning an arbitrage profit of $3,420. As in the book's example, assume that ALL bonds have a face value of $1000. i.e. there are no zero-coupon bonds with face values of $50 (the size of the coupons). Hence, you'll need to scale the number coupon bonds that you are buying by a factor of 20 (=1000/50), so that the collective coupon payments every 6 months are $1000, not $50 - which then allows you to replicate the collective coupon payments every 6 months with a single zero-coupon bond. Trade # ************ 2 3 4 5 6 8 9 10 11 12 Are you The Bond's Buying or Time to Maturity Selling? (TTM) (in Years) The Bond's The Bond's Quantity Coupon Bought or Sold Rate Trading Price (in dollars) Overall Cash Flow from buying or selling (with+/-sign) (in dollars) SUM Lyou can trade in order to earn an immediate arbitrage profit. I have provided a table below to aid you in constructing your trades. Hint: Notice that the actual price of the 4 year coupon bond is $1055 (=105:16) whereas, if it agreed with the yield curve, it would be (should be) selling for $1155 (=115:16) (also known as the no arbitrage price). In any arbitrage trade (which is always driven by a mis-pricing), you want to buy low (i.e. buy the coupon bond at the lower value of $1055) and sell high (i.e. sell the equivalent of the coupon bond at a higher value of $1155 - via replicating it with zeros, and then selling the zeros). i.e. you'll want to buy the 4 year coupon bonds cheaply, and then break them up and sell them as a portfolio of zeros - for a higher price than you paid for the coupon bonds). For more specific insights, and a numerical example, review the no-arbitrage example in the section titled "The Relation Between Coupon Bonds and Zeros" - and focus on the trades used there to earning an arbitrage profit of $3,420. As in the book's example, assume that ALL bonds have a face value of $1000. i.e. there are no zero-coupon bonds with face values of $50 (the size of the coupons). Hence, you'll need to scale the number coupon bonds that you are buying by a factor of 20 (=1000/50), so that the collective coupon payments every 6 months are $1000, not $50 - which then allows you to replicate the collective coupon payments every 6 months with a single zero-coupon bond. Trade # ************ 2 3 4 5 6 8 9 10 11 12 Are you The Bond's Buying or Time to Maturity Selling? (TTM) (in Years) The Bond's The Bond's Quantity Coupon Bought or Sold Rate Trading Price (in dollars) Overall Cash Flow from buying or selling (with+/-sign) (in dollars) SUM