Investor wishes to invest only for a l-year horizon. As a result she can choose between the two strategies: • Strategy 1: purchase the 1-year bond and hold to maturity • Strategy 2: purchase the 2-year bond and sell it after one year. (a) (Express in %, round-up all your answers to 2 decimal places.) Calculate the investor's expected return from each of the strategies. (Ь) Which of the two strategies would she prefer?
Investor wishes to invest only for a l-year horizon. As a result she can choose between the two strategies: • Strategy 1: purchase the 1-year bond and hold to maturity • Strategy 2: purchase the 2-year bond and sell it after one year. (a) (Express in %, round-up all your answers to 2 decimal places.) Calculate the investor's expected return from each of the strategies. (Ь) Which of the two strategies would she prefer?
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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Transcribed Image Text:3. Investor wishes to invest only for a l-year horizon. As a result she can choose between the
two strategies:
• Strategy 1: purchase the 1-year bond and hold to maturity
• Strategy 2: purchase the 2-year bond and sell it after one year.
(a)
(Express in %, round-up all your answers to 2 decimal places.)
Calculate the investor's expected return from each of the strategies.
(Ъ)
Which of the two strategies would she prefer?
Transcribed Image Text:A 1-year zero coupon bond has a par value $100 and is priced at $97. A 2-year zero coupon bond
has a par value $100 and costs $90. An investor is uncertain about future yields but believes
that the expected value of the future short rate (a year from today) is 4%.
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