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Part 11 Suppose that most investors have short-term horizons and therefore are willing to hold the 2-year bond only if its price falls to $873.53, which is less that the price you calculated in the previous part. Given that the bond's face value ($1,000) is fixed, a lower price means higher holding period returns for investors. They are bearing liquidity risk and rightfully getting compensated for that with higher returns. (f2 = E[r2] + liquidity premium) Option: 2-year zero The investor buys the 2-year zero and sells it next year. What would be the expected holding-period return on the 2-year bond? (hint: use its current price and its price next year) Part 11 Suppose that most investors have short-term horizons and therefore are willing to hold the 2-year bond only if its price falls to $873.53, which is less that the price you calculated in the previous part. Given that the bond's face value ($1,000) is fixed, a lower price means higher holding period returns for investors. They are bearing liquidity risk and rightfully getting compensated for that with higher returns. (f2 = E[r2] + liquidity premium) Option: 2-year zero The investor buys the 2-year zero and sells it next year. What would be the expected holding-period return on the 2-year bond? (hint: use its current price and its price next year)

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