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b) The prices of risk-free zero-coupon bonds are: Time to Maturity 1 2 3 4 5 i. ii. Today (t = 0) Transaction $ CF
b) The prices of risk-free zero-coupon bonds are: Time to Maturity 1 2 3 4 5 i. ii. Today (t = 0) Transaction $ CF $ $ Calculate the one-year forward interest rates for each year. [4 marks] You are worried that interest rates will decrease in the future. Therefore, you want to fix today the return that you will receive on a one-year investment that you plan to start in exactly three years from now. Your goal is to get $1,000 in four years (i.e., one year after you start your investment). How could you accomplish this goal using the zero-coupon bonds listed above? Clearly state the positions that you need to take in each bond and the cash flows derived from this strategy at every relevant point in time. Include a table like the one below with your results. What return (expressed as an EAR) will you obtain in your investment? (Hint: assume that you can trade fractions of any bond). [8 marks] Price 980.00 955.00 925.00 885.00 836.00 In three years (t = 3) Transaction CF In four years (t = 4) Tra
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