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Consider an investment management firm that buys a 5-year zero-coupon government bond. This bond has a par value of 100. Calculate the one-year investment return
Consider an investment management firm that buys a 5-year zero-coupon government bond. This bond has a par value of 100. Calculate the one-year investment return for this bond using the spot rates in table 1. Assume the coupon payment frequency is annual for your calculations. Explain your answer clearly and comment on your results.
Table 1. Euro spot rates at start date, and one-year later
Time Period | Spot rates | Spot rates |
| starting period | one-year later |
|
| |
1 year | 0.25% | 0.00% |
2 year | 0.75% | 0.50% |
3 year | 1.75% | 1.50% |
4 year | 3.00% | 2.75% |
5 year | 4.50% | 4.25% |
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