Arbitrage pricing

In practice smart people will identify arbitrage

opportunities and trade on them
This will increase the demand for the bond and
raise its price until no further arbitrage trades are
possible, i.e. until prices are in equilibrium
In this course we are interested in finding those
equilibria, e.g. arbitrage-free prices
We can not say whether it was the bond price or
the banks interest rate that was wrong
We can only say (and only care) if the prices are
internally consistent