Question
As a portfolio manager for an Barletta Bank, you are about to invest $10 Billion in one of four possible investments: 12-year zero-coupon bonds issued
As a portfolio manager for an Barletta Bank, you are about to invest $10 Billion in one of four possible investments: 12-year zero-coupon bonds issued by Boudreaux Boats; 10-year 12%-coupon bonds issued by Boudreaux Boats; 7-year 8%-coupon bonds issued by Boudreaux Boats; 1-year commercial paper issued by Boudreaux Boats (commercial paper is 1-year debt, like a bank issuing a 1-year CD. You plan to maintain your investments for exactly one year. You anticipate that U.S. economic growth will increase substantially over the next year, while most other investors believe that the attached yield curve accurately reflects expectations for economic growth during the next year.
Assuming your expectations about the economy are correct, how well will each of these 4 fixed-income investments perform over the next 1 year relative to each other? Which investment should you choose and why?
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