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3. Today is January 1, 2020, and you obtain the following quotes from the Wall Street Journal for several traded Treasury bonds with different maturities and coupon rates. Assume that coupons are paid semi-annually (so you don't have to worry about accrued interest) and that you are able to sell/buy at the quoted bid ask prices. Face value of all bonds is $100. Table 1: Treasury Quotes - January 1, 2020 Maturity 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 Coupon (%) 0.50 1.00 2.00 1.50 3.00 Bid 99.75 98.25 98.80 97.30 101.45 Ask 99.85 98.65 99.15 98.50 101.95 (a) You short sell a Treasury bond with a maturity of 12/31/2020, and then close your short position 6 months later, right after collecting the coupon payment. Suppose that the bid-ask quotes for that bond in 6 months is 98.60 - 99.05. What is your holding period return on the bond? (b) Using the bonds in Table 1, build a portfolio that replicates the cash-flows of a zero- coupon bond with a maturity of 9/30/2020. (c) What does it cost to buy, and the proceeds received from selling, the replicating port- folio from part (b)? (d) Suppose you find a zero-coupon bond with a maturity of 12/31/2020 trading for bid- ask price of 98.45 - 98.65. Can you build an arbitrage strategy? In the affirmative, what is your profit your profit from the strategy? Describe your strategy carefully. 3. Today is January 1, 2020, and you obtain the following quotes from the Wall Street Journal for several traded Treasury bonds with different maturities and coupon rates. Assume that coupons are paid semi-annually (so you don't have to worry about accrued interest) and that you are able to sell/buy at the quoted bid ask prices. Face value of all bonds is $100. Table 1: Treasury Quotes - January 1, 2020 Maturity 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 Coupon (%) 0.50 1.00 2.00 1.50 3.00 Bid 99.75 98.25 98.80 97.30 101.45 Ask 99.85 98.65 99.15 98.50 101.95 (a) You short sell a Treasury bond with a maturity of 12/31/2020, and then close your short position 6 months later, right after collecting the coupon payment. Suppose that the bid-ask quotes for that bond in 6 months is 98.60 - 99.05. What is your holding period return on the bond? (b) Using the bonds in Table 1, build a portfolio that replicates the cash-flows of a zero- coupon bond with a maturity of 9/30/2020. (c) What does it cost to buy, and the proceeds received from selling, the replicating port- folio from part (b)? (d) Suppose you find a zero-coupon bond with a maturity of 12/31/2020 trading for bid- ask price of 98.45 - 98.65. Can you build an arbitrage strategy? In the affirmative, what is your profit your profit from the strategy? Describe your strategy carefully

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