You believe that 6 months from now, the 12-month treasury spot rate will be 7%. You...

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Finance

You believe that 6 months from now, the 12-month treasury spotrate will be 7%. You believe that 1 year from now, the 6-monthtreasury spot rate will be 6.00%. Given the treasury spot ratesbelow, which of the following strategies would generate the highestreturn?
Term Spot Rate
6-month 4.00%
12-month 4.20%
18-month 4.50%
24-month 4.90%
30-month 5.40%
36-month 5.70%
42-month 6.00%
48-month 6.40%
Invest in an 18-month treasury.
Invest in a 12-month treasury, at maturity reinvest proceeds ina 6-month treasury.
Invest in a 6 month treasury, at maturity reinvest proceeds ina 12-month treasury.
You are indifferent between all 3 strategies.

Term	Spot Rate
6-month	4.00%
12-month	4.20%
18-month	4.50%
24-month	4.90%
30-month	5.40%
36-month	5.70%
42-month	6.00%
48-month	6.40%

Answer & Explanation Solved by verified expert

4.4 Ratings (835 Votes)

In order to compare the return from investing in different strategies we will assume that an Investor has 1000 to Invest Keep in mind that the spot rate is an annual yield 1 Investing in an 18month treasury The return from this strategy can be computed as follows 1000 100451812 10682537 Thus the return can See Answer

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You believe that 6 months from now, the 12-month treasury spot rate will be 7%. You...

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Finance

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