Answered step by step
Verified Expert Solution
Question
1 Approved Answer
In the real world, the yield curve typically slopes up, meaning a long-term bond often has a higher YTM than a short-term bond. Keep in
In the real world, the yield curve typically slopes up, meaning a long-term bond often has a higher YTM than a short-term bond. Keep in mind that the YTM is annualized. Why would any investor buy short-term bonds? Use the following example to facilitate your answer.
Suppose that 1-year Treasury bonds yield 5% while 2-year bonds yield 6%. If you have $1,000 to invest for 2 years. Compare the following alternatives:
- A: Buy the 2-year bond
- B: Buy two consecutive 1-year bonds
Would the higher yield on 2-year bonds cause you to prefer them? Why would anyone choose B?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started