Question: For this problem assume the spot rate curve $1 = 2%, S2 = 2.5%, $3 = 3%, $4 = 3.5% is valid. (a) Assuming no-arbitrage,

For this problem assume the spot rate curve $1 = 2%,

For this problem assume the spot rate curve $1 = 2%, S2 = 2.5%, $3 = 3%, $4 = 3.5% is valid. (a) Assuming no-arbitrage, calculate the fair forward rate f1,4. State your answer as a percentage to three significant figures. (b) Using the spot rate curve, find the no-arbitrage price of a 4-year bond with face value 200,000 with annual coupons at rate 3% and redeemable at par. State your answer to the nearest pound. (C) Supposing the market price of the bond in (b) was lower than the no-arbitrage price you found, explain how you would you construct an arbitrage. [5] [7]

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