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Years to Maturity Zero- Coupon Yield One-Year Implied Forward Rate 1 2 3 6.00% 6.50% 7.00% 7.00236% 8.00705% on the 2 = 9. Consider the effective annual rates for the zero-coupon yield for years 1, 2 and 3, based table above a. Suppose that you observe in the market ro(1,2) = 6.8%. Show how buying the 2-year zero-coupon bond and borrowing at the 1-year rate and implied forward rate of 6.8% would earn you an arbitrage profit. b. Suppose that you observe in the market ro(1, 2) = 7.2%. Show how borrowing the 2- year zero-coupon bond and lending at the 1-year rate and implied forward rate of 7.2% would earn you an arbitrage profit. Years to Maturity Zero- Coupon Yield One-Year Implied Forward Rate 1 2 3 6.00% 6.50% 7.00% 7.00236% 8.00705% on the 2 = 9. Consider the effective annual rates for the zero-coupon yield for years 1, 2 and 3, based table above a. Suppose that you observe in the market ro(1,2) = 6.8%. Show how buying the 2-year zero-coupon bond and borrowing at the 1-year rate and implied forward rate of 6.8% would earn you an arbitrage profit. b. Suppose that you observe in the market ro(1, 2) = 7.2%. Show how borrowing the 2- year zero-coupon bond and lending at the 1-year rate and implied forward rate of 7.2% would earn you an arbitrage profit

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