Michelle has excess cash for a period of 12-months. Instead of buying a 1-Year CD, she decided to buy a 2-Year CD and receive higher returns and hope to get a higher price when she sells it in the secondary market after 12 months. If the implied second year forward rate on this 2-year CD is 2.5%, which of the following statement is true?

Group of answer choices

2. If 1-Year spot rate at the beginning of second year is 3.5%, she will gain money using this strategy

Both 1 and 2 are true

Both 1 and 2 are false

1. If 1-Year spot rate at the beginning of second year is 1.5%, she will lose money using this strategy