You?ve recent been hired as an analyst by a small hedge fund, Foster Capital (FC), to help them analyze future investments opportunities. Up until now, FC has specialized in equities, but they are considering expanding into the fixed income market. Your first major assignment is to analyze two zero-coupon U.S. Treasury securities, also called STRIPS: a 1-year security and a 10-year security, bond with a $1,000 face values. The yields are given in Table 1. The current market price of the 1-year security is $962.11 and the current market price of the 10-year security is $603.23.

1. Calculate a fair price for the two Treasury securities. Are they currently priced correctly?
2. If you were to buy each security today and hold each to its respective maturity, what would be your annualized rate of return (APR) for each security?
3. What is the net present value (NPV) of purchasing each security?
4. The associate supervising your work constantly says that buying the higher yielding security is a ?superior? investment. Do you agree? Why or why not?

Table 1 Yield to Maturity Treasury security A Treasury security B 1 3.90% Maturity (years) 5 10 4.50% 5.10% Maturity (years) Face value Market price 1 $ 1,000.00 $ 962.11 10 $ 1,000.00 $ 603.23 Helpful excel command for computing yields: RATE() 30 6.20% Table 2 SRT YCV E) Latest Price Face Value Maturity (years) Coupon Rate Default Probability $ 10,131.00 $ 10,000.00 1 6.00% 1% $ 8,917.00 $ 10,000.00 1 7.50% 30% Recovery Rate Risk Adjustment 90% 0.40% 40% 2.80% Please see the assignment Excel File (Foster Capital) for Tables 1 and 2 Individual Assignment - Bonds You've recent been hired as an analyst by a small hedge fund, Foster Capital (FC), to help them analyze future investments opportunities. Up until now, FC has specialized in equities, but they are considering expanding into the fixed income market. Your first major assignment is to analyze two zero-coupon U.S. Treasury securities, also called STRIPS: a 1-year security and a 10-year security, bond with a $1,000 face values. The yields are given in Table 1. The current market price of the 1-year security is $962.11 and the current market price of the 10-year security is $603.23. a) Calculate a fair price for the two Treasury securities. Are they currently priced correctly? b) If you were to buy each security today and hold each to its respective maturity, what would be your annualized rate of return (APR) for each security? c) What is the net present value (NPV) of purchasing each security? d) The associate supervising your work constantly says that buying the higher yielding security is a \"superior\" investment. Do you agree? Why or why not