Question
Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 5 percent today, a two-year bond paying 5.4 percent today, a
Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 5 percent today, a two-year bond paying 5.4 percent today, a three-year bond paying 5.8 percent today, or a four-year bond paying 6.2 percent today, if a one-year bond purchased one year from now is expected to have an interest rate of 6 percent, a one-year bond purchased two years from now is expected to have an interest rate of 7 percent, and a oneyear bond purchased three years from now is expected to have an interest rate of 8 percent. Arrange the sequence of bonds giving the interest rate from highest to the lowest. Which bond would the investor buy? Show your work.
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