Practice Question 1 Suppose three bonds are currently traded in the market. Bond 1 is a pure discount (zero- coupon) bond that matures in one year, has a face value of $1,000, and a yield-to-maturity of 5%. Bond 2, maturing in two years with a face value of $1,000, is a coupon bond with annual coupons and 8% coupon rate. Bond 2 trades at par. Bond 3 is a pure discount (zero- coupon) bond that matures in three years, has a face value of $1,000, and has a price of $750. Part A- What is the term structure of spot rates, r1,r2 and r3? Part B- What are the yield-to-maturities of bonds 2 and 3? Part C-What is the forward rate for the third year,,? Part D - Now suppose that the government is issuing a new level coupon bond, bond 4, which matures in three years, and has a face value of $1,000 annual coupons at 10% coupon rate. Suppose its price is $900. Can you make an arbitrage profit in this situation? If so, how? Describe your strategy carefully