The following spot rates are observed today. Maturity Spot rate (%) 1 year 0.75 2 year 1.50 3 year 2.30 4 year 2.75 5 year 3.25 If an investor with a five-year investment horizon expects that two-year rates will be 5% at the end of three years, what should the investor do?

The following spot rates are observed today. Maturity Spot rate (%) 1 year 0.75 2 year 1.50 3 year 2.30 4 year 2.75 5 year 3.25 If an investor with a five-year investment horizon expects that two-year rates will be 5% at the end of three years, what should the investor do?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 4P

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Question

The following spot rates are observed today.

Maturity	Spot rate (%)
1 year	0.75
2 year	1.50
3 year	2.30
4 year	2.75
5 year	3.25

If an investor with a five-year investment horizon expects that two-year rates will be 5% at the end of three years, what should the investor do?

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Step 2: Calculate the Present Value (PV) of $1 to be received in three years:

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Step 3: Calculate the future value (FV) of this present value:

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Step 4: Calculate the PV of this future value (from year 3 to year 5):

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