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2. 2 Figure 7.1: A Graphical Representation of “Arbitraging the Zero-coupon Bond Price Curve” Time (T) Prices P(0,T) ||||01234||||01234 1 X FMFM F=M X X  given price F  fair price M  market price

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4. 4 Figure 7.2: An Example of a Four-Period Zero-Coupon Bond Price Process. The Value of the Money Market Account and the Spot Rates are Included on the Tree. Actual Probabilities Along Each Branch of the Tree.

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9. 9 Figure 7.3: The Rate of Return Processes for the Four-Period Zero-Coupon Bond and the Money Market Account in Figure 8.2. Actual Probabilities Are Along Each Branch of the Tree.

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18. 18 Figure 7.4: Arbitrage-Free Values (P(t,2;s t )) and Synthetic Portfolio Positions (n 0 (t;s t ), n 3 (t;s t )) for the Two-Period Zero-Coupon Bond. The actual probabilities are along each branch of the tree with the pseudo-probabilities in parentheses.

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20. 20 Figure 7.5: Arbitrage-Free Values (P(t,3;s t )) and Synthetic Portfolio Positions (n 0 (t;s t ), n 4 (t;s t )) for the Three- Period Zero-Coupon Bond. The actual probabilities are along each branch of the tree with the pseudo- probabilities in parentheses.

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