You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%....
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You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. You believe that 18 months from now, the 6-month treasury spot rate will be 5%. Given the treasury spot rates below, which of the following strategies would generate the highest return?
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 in a 6-month treasury.
Invest in a 6 -month treasury, at maturity reinvest proceeds in a 12-month treasury.
Invest in a 24-month treasury but sell 6-month prior to maturity.
You are indifferent between all 3 strategies.
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