To commit to saving in year 3, you would need a cash outflow of $500,000 in year 3. To get this, you need a cash inflow of $500,000/1.02853 ≈ $459,575.76. Buy 4-year Treasuries for this amount today. Finance them by short-selling simultaneously 3-year Treasuries for the same amount. A visual representation is shown below.

Transcribed Image Text:

t=0 t=1 4-year Treasury t=2 + t=3 t=4 -$459,576 (buy) +$519,250 3-year Treasury t=0 +$459,576 (short-sell) t=1 t=2 + t=3 t=4 -$500,000 t=0 t=1 t=2 t=3 t=4 Net position $0 -$500,000 +$519,250