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You are a fixed income portfolio manager. Recently, you have been reading economic research that forecasts a stable yield curve environment. You want to

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You are a fixed income portfolio manager. Recently, you have been reading economic research that forecasts a stable yield curve environment. You want to exploit this by implementing a 'riding the yield curve strategy' to enhance your returns. You are presented with following 5 zero-coupon bonds with the same R100 nominal value and a 7% annual coupon rate at time t = 0: Maturity Zero coupon rate Bond price Bond price (years) (%) at t = 0 at t = 1 1 1.25% 105.679 105.679 2 1.75% 110.364 110.364 3 2.27% 113.806 113.806 4 2.96% 115.534 115.534 5 3.54% 116.464 Milpark Education Equities and Fixed Income EQFI01-8 Assignment B February 2024 Page 5 of 8 You have an investment horizon of 1 year and wish to purchase a bond with maturity of 4 years. Required: 4.1 Calculate the excess return that you can earn by riding the yield curve. (3) 4.2 Explain what you would expect to happen to the returns of the strategy should the yield curve flatten. (2)

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