Question
Jack and Jill are each seeking to invest $1,000 for two years. They observe in the market a zero-coupon T-note with one year left to
Jack and Jill are each seeking to invest $1,000 for two years. They observe in the market a zero-coupon T-note with one year left to maturity yielding 5 percent and another zero-coupon T-note yielding 7 percent with two years to maturity. Jack chooses to purchase the 2-year T-note and Jill chooses to pur- chase the one-year T-note, with the idea of rolling it over for the second year. Under what conditions will Jack's investment be superior to Jill's investment? What would cause Jill to have the superior investment? Could they end up with identical re- turns after two year?
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