A trip to the Money Store finds price tags for three different securities that deliver $1 at three different future dates. You can pay $.98280 today for $1 delivered in 1 year; or $.95650 today for $1 delivered in 2 years; or $.91439 today for $1 delivered in 3 years. a. Compute the yield-to-maturity on each of these three single-payment securities: i. What is the yield-to-maturity on this 1-year zero-coupon investment? ii. What is the yield-to-maturity on the 2-year zero-coupon investment? iii. What is the yield-to-maturity on the 3-year zero-coupon investment? b. What forward 1-year rate does this market price for the period beginning 1-year from now? (i.e., at what rate would you just break-even rolling over the initial 1-year security for an additional year versus the simpler alternative of just buying the 2-year security today) c. What forward 1-year rate does this market price for the period beginning 2-years from now? (i.e., at what rate would you just break-even rolling over the initial 2-year security for an additional year versus the simpler alternative of just buying the 3-year security today) Suppose that you think the Central Bank will raise the 1-year rate to 2.75% next year and then to 3.75% the following year and also suppose that you investment horizon is 3 years. From your very specific point of view, choose one of three strategies

From your very specific point of view, choose one of three strategies: o Buy the 1-year zero-coupon bond with a plan to reinvest by rolling over into a new 1-year zero-coupon bond next year at your expected 2.75% rate and rolling over again in 2 years at your expected 3.75% rate or o Buy the 2-year zero-coupon bond with a plan to reinvest for the final 1- year at your expected 3.75% or o Buy the 3-year zero-coupon bond and hold. Identify your chosen strategy and explain the reason for your choice