Assuming semi-annual compounding and that zero coupon bonds of all maturities are available, an investor wants to 'ride' the yield curve and considers the following strategies: i. ii. Buying a 2 year zero coupon bond today and holding it until maturity Buying a 5 year zero coupon bond today and selling it in two year's time What assumptions are usually made when implementing a riding the yield curve strategy? Using these assumptions, calculate the return to each of the strategies above and therefore deduce which strategy this investor will choose. Maturity (years) 1 2 3 5 Yield 5% 5.25% 5.5% 6% Note: All yields above are nominal annual rates but we assume all bonds pay interest semi-annually.