Question 3 a) Explain the strategy Riding the Yield Curve in the bond market (30% weighting) b) Currently, the term structure is as follows: one-year bonds yield 7%, two-year bonds yield 8%, three-year bonds and greater maturity bonds all yield 9%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 8%, once a year. The principal value of all of the bonds is 1000. Which bond should you buy if you strongly believe that at year-end the yield curve will be flat at 9%? (30% weighting) c) Suppose, however, at the year-end, the term structure turns out to be as follows: one-year bonds yield 6%, two-year bonds yield 11%, three-year bonds and greater maturity bonds all yield 13%. - Page 3 of 4 - [Turn over Calculate the profit and loss from the investment in question 3(b)? (20% weighting) (ii) Comment on the risks of implementing the strategy Riding the Yield Curve in the bond market