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1. A zero-coupon bond (zcb) is a bond that does not make coupon payments, only the face value being paid on the maturity date. Consider two zcb's that pay risk-free cash flows over the next two years. The first has a price of $96.15 today, and will pay $100 at the end of first year. The second has a price of $90.70 today, and will pay $100 at the end of second year. (a) What is the no-arbitrage price of a security that pays cash flows of $100 at the end of first year and $100 in the second years? (b) What is the no-arbitrage price of a security that pays cash flows of $300 at the end of first year and $200 at the end of second year? (c) Suppose a security with cash flows of $200 at the end of first year and $300 at the end of second year is trading for a price of $460. Is there an arbitrage opportunity? If so, how to form a trading strategy to exploit it? (d) What is the no-arbitrage price for a zcb that starts at the end of first year and will pay $100 at the end of second year? (Hint: assuming nothing will change in one year and get the zcb's price at the end of year one] 1. A zero-coupon bond (zcb) is a bond that does not make coupon payments, only the face value being paid on the maturity date. Consider two zcb's that pay risk-free cash flows over the next two years. The first has a price of $96.15 today, and will pay $100 at the end of first year. The second has a price of $90.70 today, and will pay $100 at the end of second year. (a) What is the no-arbitrage price of a security that pays cash flows of $100 at the end of first year and $100 in the second years? (b) What is the no-arbitrage price of a security that pays cash flows of $300 at the end of first year and $200 at the end of second year? (c) Suppose a security with cash flows of $200 at the end of first year and $300 at the end of second year is trading for a price of $460. Is there an arbitrage opportunity? If so, how to form a trading strategy to exploit it? (d) What is the no-arbitrage price for a zcb that starts at the end of first year and will pay $100 at the end of second year? (Hint: assuming nothing will change in one year and get the zcb's price at the end of year one]

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