3.

Consider the following 2 Treasury Strips:

Treasury Strip A pays $100,000 in 4 years. Treasury Strip B pays $10,000 in 7 years.

Suppose interest rates drop at every maturity.

At the time that interest rates fall, which of the following is true:

A. Both Treasury Strips A and B will have a negative return with Treasury Strip As return going down by more than Treasury Strip B.

B.Both Treasury Strips A and B will have a negative return with Treasury Strip As return going down by less than Treasury Strip B.

C.Both Treasury Strips A and B will have a negative return with Treasury Strip As return and Treasury Strip Bs return being going down by the same amount.

D. Treasury Strip As return will be positive but Treasury Strip Bs return will be negative. E. Treasury Strip As return will be negative but Treasury Strip Bs return will be positive. F. The fall interest rates will not affect the return of either Treasury Strip. G. Both Treasury Strips A and B will have a positive return with Treasury Strip As return going up by more than Treasury Strip B. H Both Treasury Strips A and B will have a positive return with Treasury Strip As return going up by less than Treasury Strip B. I. Both Treasury Strips A and B will have a positive return with Treasury Strip As return and Treasury Strip Bs return going up by the same amount.

Recall that return means percentage growth in value.