Question 1 You observe that the current three-year discount factor for default-risk free cash times is 0.68. Remember, the thyear discount factor is the present value of $1 paid at time t, led = (1 + r), where is the f-year spot interest rate (annual compounding). Assume all bonds have a face value of $100 and that all securities are default-risk free. All cash flows occur at the end of the year to which they relate. a) What is the price of a zero-coupon bond maturing in exactly 3 years? (5 marks) b) Your friend makes the following observation about the above bond "Since there is no risk of default and there are no coupons to re-invest, buying the 3-year zero an annual return of 13.72% (1.0.3-year spot rate)". Explain why your friend is not entirely correct and how you would modify the statement to make it correct