Compare it with the forward and comment on what you find. (5 points)

The table below presents the spot rates an investor faces. (50 points) Year 1 2 Spot rates 2% 3% 4% 5% 3 4 Assume that, for each maturity, there is a zero-coupon bond traded in the market. These zeros pay $1,000 at their respective maturity. a. Is the term structure positive, inverted, or flat? (5 points) b. What is the forward rate from t=1 to t=2? (5 points) c. Suppose that the investor is expecting to receive $1 million at t=1. This is a future cash inflow. He is planning to do the following investment strategy for this future cash inflow. He will borrow $980392.16 (this is $1 million /(1+2%)) now and use this borrowing to buy a two-year zero. At t=1, the one-year zero matures, and he will make the payment to the one-year zero lenders. At t=2, the two- year zero matures, and he will receive the payment from the two-year zero. Fill in the below cash flow table (the unit is $1 million). (25 points) t=0 t=1 t=2 One-year zero 1 0 Two-year zero 0 0 1 0 Others (the $1 million that the investor is expecting to receive at t=1) Total 0 0 d. What is the net return that this investor will get from his $1 million future cash flow from t=1 to t=2? Compare it with the forward and comment on what you find. (5 points) The table below presents the spot rates an investor faces. (50 points) Year 1 2 Spot rates 2% 3% 4% 5% 3 4 Assume that, for each maturity, there is a zero-coupon bond traded in the market. These zeros pay $1,000 at their respective maturity. a. Is the term structure positive, inverted, or flat? (5 points) b. What is the forward rate from t=1 to t=2? (5 points) c. Suppose that the investor is expecting to receive $1 million at t=1. This is a future cash inflow. He is planning to do the following investment strategy for this future cash inflow. He will borrow $980392.16 (this is $1 million /(1+2%)) now and use this borrowing to buy a two-year zero. At t=1, the one-year zero matures, and he will make the payment to the one-year zero lenders. At t=2, the two- year zero matures, and he will receive the payment from the two-year zero. Fill in the below cash flow table (the unit is $1 million). (25 points) t=0 t=1 t=2 One-year zero 1 0 Two-year zero 0 0 1 0 Others (the $1 million that the investor is expecting to receive at t=1) Total 0 0 d. What is the net return that this investor will get from his $1 million future cash flow from t=1 to t=2? Compare it with the forward and comment on what you find. (5 points)