3. The yield-to-maturity for a zero coupon bond is 6.30% for a 1-year bond, 7.13% for...

 

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3. The yield-to-maturity for a zero coupon bond is 6.30% for a 1-year bond, 7.13% for a 2-year bond, and 7.62% for a 3-year bond. You think the yield curve will remain the same throughout the future. You wish to make a 1-year investment, that is, buy a bond today and sell it in one year. You can pursue three alternative strategies, call them S1, S2, and S3. For strategy S1, you buy the 1-year bond and hold it to maturity, in which case your annual rate of return obviously is 6.30%. For S2, buy a 2-year bond today and sell it when it has 1 year remaining to maturity. For S3, buy a 3-year bond today and sell it when it has 2 years remaining to maturity. (Assume, if necessary, that you can buy fractions of bonds.) 3. The yield-to-maturity for a zero coupon bond is 6.30% for a 1-year bond, 7.13% for a 2-year bond, and 7.62% for a 3-year bond. You think the yield curve will remain the same throughout the future. You wish to make a 1-year investment, that is, buy a bond today and sell it in one year. You can pursue three alternative strategies, call them S1, S2, and S3. For strategy S1, you buy the 1-year bond and hold it to maturity, in which case your annual rate of return obviously is 6.30%. For S2, buy a 2-year bond today and sell it when it has 1 year remaining to maturity. For S3, buy a 3-year bond today and sell it when it has 2 years remaining to maturity. (Assume, if necessary, that you can buy fractions of bonds.)

Answer rating: 100% (QA)

To compare the three strategies we need to calculate the expected annual rate of return for each of ... View the full answer