A 1-year treasury bond currently yields 8%, and a 2-year bond yields 10%. An investor who wants to invest for a 2-year horizon is choosing between alternatives of buying the 2-year security and hold it for 2 years or buying a 1-year security and hold it for a year and reinvest the proceeds in another 1-year security. What would be the rate of the 1-year rate one year from now so that options of the investor will be indifferent holding the pure expectation theory? 13.05% 11.02% 12.04% 10.40%
A 1-year treasury bond currently yields 8%, and a 2-year bond yields 10%. An investor who wants to invest for a 2-year horizon is choosing between alternatives of buying the 2-year security and hold it for 2 years or buying a 1-year security and hold it for a year and reinvest the proceeds in another 1-year security. What would be the rate of the 1-year rate one year from now so that options of the investor will be indifferent holding the pure expectation theory? 13.05% 11.02% 12.04% 10.40%
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 10P
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Question
A 1-year treasury bond currently yields 8%, and a 2-year bond yields 10%. An investor who wants to invest for a 2-year horizon is choosing between alternatives of buying the 2-year security and hold it for 2 years or buying a 1-year security and hold it for a year and reinvest the proceeds in another 1-year security. What would be the rate of the 1-year rate one year from now so that options of the investor will be indifferent holding the pure expectation theory?
13.05%
11.02%
12.04%
10.40%
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