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1. () Suppose that we live in a market where we have the following bonds: (a) What is the term structure in this economy? (b) What are the forward rates in this economy? In particular, spell out what rate you can get for an investment at date 1 that matures at date 2, and for an investment at date 2 that matures at date 3 . (c) Suppose that we have a security with the following cash flows: What is the value of this security? (d) How would you replicate the payoffs of the previous security by trading in the bonds given above? Given an explicit description of the units of each bond in the replicating portfolio. (e) If someone was willing to trade the bond for $424.95$425.05 (bid-ask prices), can you create an arbitrage trading on this bond and the three bonds given? 2. () An immunized bond portfolio is that which, for a given fixed target date, gives the holder a fixed return no matter what happens to interest rates from the initial date and the future target date. (a) Suppose that you have $1000 and you want to construct an immunized portfolio with a target date of three years. You can only trade on the bonds from the previous problem. What bonds would you buy and in what amounts? What return will you get? (b) Suppose that you want to construct an immunized portfolio with a target date of 2 years. You can only trade on the bonds from the previous problem. What bonds would you buy and in what amounts? What return will you get? (c) How do the rates of return from the previous questions relate to the yields to maturity of the three bonds from the previous