Question $2$

$15$ pts

Suppose that you own a perpetual bond that pays you $$350$ every Dec $31.$ Market interest rates today are $5\%.$ If you wish to sell this bond today, what would be the price you could sell it at today?

You have the following information today. A bond that matures in one year has a $5\%$ interest rate, a bond that matures in two years has an interest rate of $6\%.$ At this time next year $($one year into the future$)$ you believe that you could buy a bond with one year to maturity with a $7\%$ interest rate. You have a two year time horizon with your funds. You have to decide today to either buy a two year bond today or a series of one year bonds. Given this information what strategy should you pursue. Justify your answer with calculations.

Uplaad $$