2. Suppose you just won $500,000 playing the lottery. You intend to invest the money and...

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2. Suppose you just won $500,000 playing the lottery. You intend to invest the money and live off the interest. You may invest in either a 10-year bond or a series of ten 1-year bonds for 10 years. Both 10-year and 1-year bonds currently yield 10%. Your investment plan is of 10 years. You can either invest one time in a 10- year bond or series of 1-year bond. a) What will be your interest income if you invest in a 1-year bond? For how many years will you earn the interest income? b) What will be your interest income if you invest in a 10-year bond? For how many years will you earn the interest income? c) Suppose the rates go down to 3% after 1-year will it affect your 10-year bond interest income? 1 year bond interest income? d) If expected interest rates are to fall, in which bond will you invest and why? 2. Suppose you just won $500,000 playing the lottery. You intend to invest the money and live off the interest. You may invest in either a 10-year bond or a series of ten 1-year bonds for 10 years. Both 10-year and 1-year bonds currently yield 10%. Your investment plan is of 10 years. You can either invest one time in a 10- year bond or series of 1-year bond. a) What will be your interest income if you invest in a 1-year bond? For how many years will you earn the interest income? b) What will be your interest income if you invest in a 10-year bond? For how many years will you earn the interest income? c) Suppose the rates go down to 3% after 1-year will it affect your 10-year bond interest income? 1 year bond interest income? d) If expected interest rates are to fall, in which bond will you invest and why?

Answer rating: 100% (QA)

A If we invest in 1 year bond then interest income per year will be equal to yield that is 10 In... View the full answer