Holding all else equal (i.e. investment strategy 1, as well as the rates on the first three bonds in strategy 2), what rate would you need to earn in the fourth year of the investment strategy 2 to be perfectly indifferent between the two strategies under the expectations hypothesis? Information from prior An investor is presented with the following two alternative strategies: (1) Purchase a 4-year bond with an interest rate of 8.45% and hold it until maturity, or (2) purchase a 1-year bond with an interest rate of 8.00% and when it matures, purchase another 1-year bond with an expected rate of 7.75% and when that matures, purchase another 1-year bond with an interest rate of 7.50%. The investor can purchase a fourth 1-year bond with an interest rate of 9.00%.
Holding all else equal (i.e. investment strategy 1, as well as the rates on the first three bonds in strategy 2), what rate would you need to earn in the fourth year of the investment strategy 2 to be perfectly indifferent between the two strategies under the expectations hypothesis?
Information from prior
An investor is presented with the following two alternative strategies: (1) Purchase a 4-year bond with an interest rate of 8.45% and hold it until maturity, or (2) purchase a 1-year bond with an interest rate of 8.00% and when it matures, purchase another 1-year bond with an expected rate of 7.75% and when that matures, purchase another 1-year bond with an interest rate of 7.50%. The investor can purchase a fourth 1-year bond with an interest rate of 9.00%.
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