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. (30 marks)

Table 1: Market data for selected bonds

Asset	Coupon	Market price
Bond A	6%	100.139
Bond B	8%	102.022

Table 2: Treasury spot rates

Period	Rates
Six months	3%
One year	4%
One and half year	5%
Two years	6%

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

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

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	3%
2	4%
3	5%

Table 4: Market data for the corporate bonds

Company	Coupon	Maturity (years)	Market price
X	6%	3	102.757
Y	8%	3	105.855

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

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