A two-year Treasury strip has a yield of 4%, and the three Treasury strip has a yield
Question:
A two-year Treasury strip has a yield of 4%, and the three Treasury strip has a yield of 4.33%. Marry thinks the one-year interest rate will be 6% for the 3rd year (2yr-3yr), and she is willing to put her money where her mouth is. (Assume that all securities are zero-coupon securities, and that market participant can lead and borrow at the same rate)
1. What is the price of the two-year Treasury strip?
$
2. What is the price of the three-year Treasury strip?
$
3. If Marry buys the two years Treasury and reinvests the proceeds from the two-year Treasury into a one-year Treasury for the 3rd year, then how many two-year Treasuries does Marry need to buy today if she wants $1,000 in three years?
% (Answer as a percent of $1,000 par value)
4. If Marry wants $1,000 in three years, how much money would Marry need to spend on the two-year Treasury if she expects to roll the proceeds over in the second year at 6%?
5. According to the expectation hypotheses, what rate does the market expect the one-year rate will be in two years?
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley