Question
The yield curve of interest rates is the most important piece of information for investors who hold fixed income securities. Let's assume that you have
The yield curve of interest rates is the most important piece of information for investors who hold fixed income securities. Let's assume that you have some private information that all spot rates are about to drop by about 1%. You have three available bonds that you can purchase: a 5-year bond that pays a 20% annual coupon, a 10-year bond that pays 10% annual coupons, and a 30-year zero coupon.
a) Explain which bond you would chose to purchase to take maximum advantage of your private information.
b) How would your answer change if the private information was the interest rates were about to increase?
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