An investor with a 6-year horizon has $ 0 1,000 to invest. Currently, the yield curve for
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Question:
An investor with a 6-year horizon has $01,000 to invest. Currently, the yield curve for zero-coupon bonds, as a function of maturity, is:
y(T) = 0.01 + 0.001T,
where T is measured in years. (e.g., the yield on a 3-year zero coupon bond is 0.013). The investor is considering two alternative investments:
1) Purchase a 10-year bond, and sell it 6 years from now
2) Purchase a 4-year bond, and then reinvest the proceeds 4 years from now into a 2-year bond.
The agent’s best guess is that, in the future, the yield curve will look the same as it does today.
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