You compiled pricing data for two semi-annual coupon payment Treasury bonds (Table 1). Each of the bonds will mature in two years, the Treasury spot rates are shown in Table 2.

Table 1: Market data for selected bonds

Asset	Coupon	Market price
Bond A	7%	96.568
Bond B	9%	101.022

Table 2: Treasury spot rates

Period	Rates
Six months	6%
One year	7%
One and half year	8%
Two years	9%

1) Calculate the arbitrage-free prices of Bond A and Bond B (6 marks)

2) Which bond will provide an arbitrage opportunity and what is the arbitrage profit? (1 mark)

Next, you want to use the benchmark yield curve provided in Table 3 to identify investment opportunities associated with two annual coupon corporate bonds. The benchmark bonds pay coupons annually and the bonds are priced at par. Table 4 provides the market data of the two corporate bonds.

Table 3: Benchmark Par Curve

Maturity (years)	Yield to Maturity
1	4%
2	5%
3	6%

Table 4: Market data for the corporate bonds

Company	Coupon	Maturity (years)	Market price
X	9%	3	108.117
Y	10%	3	109.794

3) Calculate the arbitrage-free prices of Bond X and Bond Y (12 marks)

4) Which bond is mispriced and what is the amount of the mispricing? (1 mark)