Show your step-by-step work for part marks. Write down the equations you are using. For problems that you will be using a financial calculator, write down your inputs for partial marks. Keep at least 4 decimal digits in all your calculation and answers unless specified otherwise. Make sure your work is legible.

Problem 5 (6 points) Assume all coupon rates are paid semi-annually. Use face value of $100. Bond A: 6-month, 2% coupon bond; priced at $103 Bond B: 1-year, 4% coupon bond; priced at $104.5 Bond C: 18 months, 10% coupon bond; priced at $109.3 Bond D: 18 months, 6% coupon bond; priced at $102 a) (3 points) Create a replicate portfolio using bonds A,B, and C to replicate cashflows from bond D. b) (1 point) Is there opportunity for arbitrage? Why or why not? c) (2 points) Find an arbitrage strategy, replicating the cash flows from Bond D. How many of each bond will you trade? Which bonds would you buy or sell? For reference, fill out the following table