Given the data in the table and the information below, please answer the following question. Show all working and formulas used. Maturity (T) r(1) r(2) r(3) r(4) r(5) r(6) Spot Rate (%) 0.15 0.22 0.25 0.28 0.20 0.13 Misty would like to invest 10,000. She is faced with the choice between 2 investments: Option 1: invest for 5 years; Option 2: invest for 3 years and reinvest for another 2 years at a forward rate of 0.07% Should she be indifferent between the choices? If not, which one is the optimal option to Misty?
Given the data in the table and the information below, please answer the following question. Show all working and formulas used. Maturity (T) r(1) r(2) r(3) r(4) r(5) r(6) Spot Rate (%) 0.15 0.22 0.25 0.28 0.20 0.13 Misty would like to invest 10,000. She is faced with the choice between 2 investments: Option 1: invest for 5 years; Option 2: invest for 3 years and reinvest for another 2 years at a forward rate of 0.07% Should she be indifferent between the choices? If not, which one is the optimal option to Misty?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- Given the data in the table and the information below, please answer the following question. Show all working and formulas used.
|
Maturity (T) |
r(1) |
r(2) |
r(3) |
r(4) |
r(5) |
r(6) |
|
Spot Rate (%) |
0.15 |
0.22 |
0.25 |
0.28 |
0.20 |
0.13 |
Misty would like to invest 10,000. She is faced with the choice between 2 investments:
Option 1: invest for 5 years;
Option 2: invest for 3 years and reinvest for another 2 years at a forward rate of 0.07%
Should she be indifferent between the choices? If not, which one is the optimal option to Misty?
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