Consider an economy with three dates (t=0,1,2) and two safe bonds. Bond A has 2% coupon and Bond B has 3% coupon. The payoffs and prices of the bonds are given as follows t=1 price at t=0 2 99.50 3 100.25 Bond A Bond B t=2 102 103 (a) Is there an arbitrage? (b) If yes, find an arbitrage portfolio.

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.