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1) Suppose you decide to purchase a 1-year zero-coupon bond today and alsocontract today to...

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Accounting

1) Suppose you decide to purchase a 1-year zero-coupon bond today and alsocontract today to re-invest the proceeds from the bond for the following two yearsat 16.5% per year. Show that this arrangement presents an arbitrage opportunity.Demonstrate how you would take advantage of this opportunity. 2) Consider discount factors such that d1 < d2 < d3. Explain why it would be odd toobserve such a situation in a competitive market.

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