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Assume we have the following yield curve. Assume all the rates are annual effective yields, Maturity (in years) | zero-coupon spot rate 1 3% 2
Assume we have the following yield curve. Assume all the rates are annual effective yields, Maturity (in years) | zero-coupon spot rate 1 3% 2 3.5% 3 3.75% 4 3.95% (a) Assume you wish to borrow money for 2 years, starting in 1 year. What interest rate should you expect to pay on your loan? (Assume you will borrow the money at time one, and make one payment of both principal and interest at the end of year 3. So this is a "zero-coupon loan.") (b) Now assume you have $10,000 to invest for a period of 1 year. Your investment choices include purchasing a zero-coupon bond maturing in 1, 2, 3, or 4 years, then selling the bond one year later. If you assume the yield curve will not change over the next year, which investment choice will be the most profitable (.e. which has the highest rate of return)
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