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Table 5.7The Term Structure of Interest Rates on May 15, 2000 Maturity Yield (..) Maturity Yield (c.c.) Maturity Yield (c.c.) 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 6. 17% 6.52% 6.32% 6.71% 6.76% 6.79% 6.77% 6.72% 6.72% 6.79% 2.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 6.78% 676% 6.77% 6.76% 6.63% 6.77% 6.77% 6.71% 6.66% 6.70% 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 6.71% 6.63% 6.69% 662% 6.63% 6.61% 6.58% 6.57% Notes: Yields calculated based on data from CRSP. 3. Today is May 15, 2000 and the continuously compounded term structure of interest rate is shown in Table 5.7. You are faced with the two investment strategies below. Is there an arbitrage opportunity? Invest $100 million in 2.5-year zero coupon bonds. Invest $100 million in a 1-year zero coupon bond and agree with the bank to invest the proceeds for the following 1.5 years at the quoted forward rate, which is: f2(0, 1, 2.5)-7.56%. Table 5.7The Term Structure of Interest Rates on May 15, 2000 Maturity Yield (..) Maturity Yield (c.c.) Maturity Yield (c.c.) 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 6. 17% 6.52% 6.32% 6.71% 6.76% 6.79% 6.77% 6.72% 6.72% 6.79% 2.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 6.78% 676% 6.77% 6.76% 6.63% 6.77% 6.77% 6.71% 6.66% 6.70% 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 6.71% 6.63% 6.69% 662% 6.63% 6.61% 6.58% 6.57% Notes: Yields calculated based on data from CRSP. 3. Today is May 15, 2000 and the continuously compounded term structure of interest rate is shown in Table 5.7. You are faced with the two investment strategies below. Is there an arbitrage opportunity? Invest $100 million in 2.5-year zero coupon bonds. Invest $100 million in a 1-year zero coupon bond and agree with the bank to invest the proceeds for the following 1.5 years at the quoted forward rate, which is: f2(0, 1, 2.5)-7.56%

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