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2005-09-25

Suppose there are 3 risk free bonds that are available in the market. Bond 1 matures in 3 years, pays annual coupons of 5%, and costs 101% of the face value. Bond 2 also matures in 3 years, pays annual coupons of 6% and costs 103.5% of the face value. Bond 3 matures in 1 year, pays an annual coupon of 8% and costs 104% of the face value. Is there a risk free arbitrage opportunity in the market, and if there is how would you exploit it using only these three bonds?

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