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You have $1,000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (i) a sequence of
You have $1,000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (i) a sequence of three one-year bonds; or (ii) a three-year bond; The current yield curve tells you that the one-year, two-year, and three-year yields to maturity are 3.5 percent, 4 percent, and 4.5 percent, respectively. You expect that one-year interest rates will be 4 percent next year and 5 percent the year after that. Assuming annual compounding, compute the return on each of the two investments
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