Suppose the annualized spot rates are as follows 6 months 3% 12 months 5% (a) Calculate...

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Suppose the annualized spot rates are as follows 6 months 3% 12 months 5% (a) Calculate the price of the 6-month Treasury bill with the par value of $100 and the price of the 12-month (zero-coupon) Treasury bill with the par value of $100. Note that the interest is compounded every six months. (4 points) (b) An investor has an investment horizon of 6 months. She can invest her money in two ways. First, buy the 6-month Treasury bill and hold it until maturity. Second, buy the 12-month Treasury bill and hold it for 6 months. The investor believes that the spot rates will stay the same 6 months from now. Which investment strategy should the investor choose if she prefers high expected holding period returns? (8 points) (c) If 6 months from now the 12-month spot rate increases to 12% and the 6-month spot rate increases to 10%, what are the realized holding period returns on the two investment strategies? (4 points) (d) Are the 6- and 12-month bonds risk-free? Explain. (4 points) Suppose the annualized spot rates are as follows 6 months 3% 12 months 5% (a) Calculate the price of the 6-month Treasury bill with the par value of $100 and the price of the 12-month (zero-coupon) Treasury bill with the par value of $100. Note that the interest is compounded every six months. (4 points) (b) An investor has an investment horizon of 6 months. She can invest her money in two ways. First, buy the 6-month Treasury bill and hold it until maturity. Second, buy the 12-month Treasury bill and hold it for 6 months. The investor believes that the spot rates will stay the same 6 months from now. Which investment strategy should the investor choose if she prefers high expected holding period returns? (8 points) (c) If 6 months from now the 12-month spot rate increases to 12% and the 6-month spot rate increases to 10%, what are the realized holding period returns on the two investment strategies? (4 points) (d) Are the 6- and 12-month bonds risk-free? Explain. (4 points)

Answer rating: 100% (QA)

a The price of the 6month Treasury bill with the par value of 100 can be calculated as follows Price Par Value 1 Rate Time 100 1 003 05 9806 Similarly ... View the full answer