Question
You want to invest in zero-coupon risk-free bonds for the next 5 years. The 5-year spot rate is 3.5%. The 3-year spot rate is 3.0%.
You want to invest in zero-coupon risk-free bonds for the next 5 years. The 5-year spot
rate is 3.5%. The 3-year spot rate is 3.0%. if you purchase a 3-year zero-coupon bond
(bond A) and then reinvest your proceeds in a 2-years zero-coupon bond (bond B) when
bond A matures, what do you expect the spot rate to be on bond B?
How do you solve? and what formula is used to do so?
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Fundamentals of corporate finance
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
2nd Edition
978-0470933268, 470933267, 470876441, 978-0470876442
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