Question: 1. ($) The term structure based on government strips is flat at 10% (annualized with con- tinuously compounded) for all maturities. Assume throughout this problem

1. ($) The term structure based on government strips is flat at 10% (annualized with con- tinuously compounded) for all maturities. Assume throughout this problem that you can borrow or lend at these rates. Three non-government (but riskless) bonds are available for purchase; all three bonds sell for $100. Bond A is a two year zero. Bond A pays $550 in year 2. Bond B and C are one year zeros. Bond B pays $225 in year 1, and Bond C pays $450 in year 1. (Note Bonds A, B, and C were not used in determining that the term structure based on government strips is flat.) Part b. A possible investment involves the purchase of both Bonds A and C. Another possible investment involves the purchase of both Bonds B and C. For each of these alternatives, calculate the annualized yield (continuously compounded) on the portfolio which holds both A and C. Also calculate the annualized yield (continuously compounded) on the portfolio which holds both B and C. In comparing these two portfolios, show that yield is not a reliable guide for investment decisions

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