Question
Suppose that you have $1,000 to invest in the bond market on January 1, 2018. You could buy a one-year bond with an interest rate
Suppose that you have $1,000 to invest in the bond market on January 1, 2018. You could buy a one-year bond with an interest rate of 4%, a two-year bond with an interest rate of 5%, a three-year bond with an interest of 5.5%, or a four-year bond with an interest rate of 6%. You expect interest rates on one-year bonds in the future to be 6.5% on January 1,2019, 7% on January 1, 2020, and 9% on January 1, 2021. You want to hold your investment until January 1, 2022. Which of the following investment alternatives gives you the highest return by 2022: (a) Buy a four-year bond on January 1, 2018; (b) buy a three year bond January 1, 2018, and a one-year bond January 1, 2021; (c) buy a two-year bond January 1, 2018, a one-year bond January 1, 2020, and another one-year bond January 1, 2021; or (d) buy a one-year bond January 1, 2018, and then additional one-year bonds on the first days of 2019, 2020, and 2021?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started