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( Term structure of interest rates ) You want to invest your savings of $ 2 2 comma 0 0 0 2 2 , 0
Term structure of interest rates You want to invest your savings of $ comma in government securities for the next years. Currently, you can invest either in a security that pays interest of per year for the next years or in a security that matures in year but pays only interest. If you make the latter choice, you would then reinvest your savings at the end of the first year for another year.
a Why might you choose to make the investment in the year security that pays an interest rate of only as opposed to investing in the year security paying Provide numerical support for your answer. Which theory of term structure have you supported in your answer?
b Assume your required rate of return on the secondyear investment is ; otherwise you will choose to go with the dash yearyear security. What rationale could you offer for your preference?
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a Why might you choose to make the investment in the year security that pays an interest rate of only as opposed to investing in the year security paying Provide numerical support for your answer. Which theory of term structure have you supported in your answer?
If you choose the year security the value of your savings after the second year will be $enter your response here. Round to the nearest dollar.
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