Question
You have a 1-year investment horizon and the following investment alternatives. Today you can buy either a 1-year T-strip, or a 6-month T-strip and when
You have a 1-year investment horizon and the following investment alternatives. Today you can buy either a 1-year T-strip, or a 6-month T-strip and when it matures in 6 months, buy another 6-month T-strip. Today, the 6-month T strip yield is 2.20% and the 1-year T-strip yield is 2.80%. If an insider gave you the information that the 6-month forward rate at the end of 6 months from now is 2% (annual), should you invest in the 1-year T strip or the 6-month T strip and then roll over to the next 6-month T strip at the 2% annualized rate? Hint: You will have to calculate the forward rate (make sure you annualize it) and then compare it with the insiders forward rate.
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