Latasha would like to invest a certain amount of money for three years and considers investing in (1) a one-year bond that pays 3 percent, followed by a two-vear bond that pays the forward rate, or (2) a three-year bond that pays 7 percent in each of the next three years. Latasha is considering the following investment strategies: Strategy A: Buy a one-vear bond that pays 3 percent in vear one, then buy a two-year bond that pays the two-year forward rate in vears two and three. Strategy B: Buy a three-vear bond that pays 7 percent in each of the next three years. If the two-year bond purchased one year from now pays 6 percent annually, Latasha will choose Which of the following describes conditions under which Latasha would be indifferent between Strategy A and Strategy B? The rate on the two-year bond purchased one vear from now is 8.333 percent. The rate on the two-year bond purchased one year from now is 9.058 percent. The rate on the two-year bond purchased one vear from now is 9.511 percent. The rate on the two-vear bond purchased one vear from now is 9.873 percent.
Latasha would like to invest a certain amount of money for three years and considers investing in (1) a one-year bond that pays 3 percent, followed by a two-vear bond that pays the forward rate, or (2) a three-year bond that pays 7 percent in each of the next three years. Latasha is considering the following investment strategies: Strategy A: Buy a one-vear bond that pays 3 percent in vear one, then buy a two-year bond that pays the two-year forward rate in vears two and three. Strategy B: Buy a three-vear bond that pays 7 percent in each of the next three years. If the two-year bond purchased one year from now pays 6 percent annually, Latasha will choose Which of the following describes conditions under which Latasha would be indifferent between Strategy A and Strategy B? The rate on the two-year bond purchased one vear from now is 8.333 percent. The rate on the two-year bond purchased one year from now is 9.058 percent. The rate on the two-year bond purchased one vear from now is 9.511 percent. The rate on the two-vear bond purchased one vear from now is 9.873 percent.
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:5. Pure expectations theory: Multi-year periods
Latasha would like to invest a certain amount of money for three vears and considers investing in (1) a one-year bond that pays 3 percent, followed
by a two-year bond that pays the forward rate, or (2) a three-year bond that pays 7 percent in each of the next three years. Latasha is considering
the following investment strategies:
Strategy A: Buy a one-vear bond that pays 3 percent in year one, then buy a two-year bond that pays the two-year forward rate in
years two and three.
Strategy B: Buy a three-year bond that pays 7 percent in each of the next three years.
If the two-year bond purchased one year from now pays 6 percent annually, Latasha will choose
Which of the following describes conditions under which Latasha would be indifferent between Strategy A and Strategy B?
The rate on the two-year bond purchased one year from now is 8.333 percent.
The rate on the two-year bond purchased one year from now is 9.058 percent.
The rate on the two-year bond purchased one year from now is 9.511 percent.
The rate on the two-year bond purchased one year from now is 9.873 percent.
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