Suppose that the basic bond that matures at t = 3 has a market price...
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Suppose that the basic bond that matures at t = 3 has a market price of 0.77 today. In adition, the price of a 2-year contract on that bond (that is, at t = 2) is 0.93.
a. What is the 3-year annual spot interest rate, r3?
b. What is the rate for two-year term (forward), which we named f3? If the price of a basic 2-year bond is 0.8
c. Are there arbitrage operations in this market?
d. What would have to be the price of the basic 2-year bond so that such that there are not arbitrage operations?
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