Suppose there are three complex securities and three different states as follows: Security So S₁(1) S₁ (2) S₁ (3) 1.2 3 0 0 1.8 4 2 0 1.2 2 1 2 10 A B C D 1 4 (a) Find the arbitrage-free price of asset D. (b) What is the risk-free return compatible with these asset prices?

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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.