Mr. Bennett wants to invest $100,000 for the next 10 years with the following investment strategy. The
Question:
Mr. Bennett wants to invest $100,000 for the next 10 years with the following investment strategy. The amount will be invested in a default-free US government security that matures every one month. Every time the security matures, Mr. Bennett will use the proceeds to invest in another government security with one month to maturity. Suppose further that one-month government securities today pay an interest rate of 5%. In Mr. Bennett’s view, this investment strategy has little risk because one-month securities have no price risk if held to maturity, and he can lock in at least a 5% return over the next 10 years.
Discuss this investment strategy and the risks associated with it.
Contemporary Business Mathematics with Canadian Applications
ISBN: 978-0134141084
11th edition
Authors: S. A. Hummelbrunner, Kelly Halliday, Ali R. Hassanlou, K. Suzanne Coombs