Which investment option would you take?

"You want to invest your savings of $20000 in government securities for the next 2 years. Currently, you can invest either in a security that pays interest of 8 percent per year for the next 2 years or in a security that matures in 1 year but pays only 6 percent. If you make the latter choice, you would then reinvest your savings at the end of the first year for another year.

Why might you choose to make the investment in the 1 year security that pays an interest rate of only 6 percent, as opposed to investing in the 2 year security paying 8 percent? Provide numerical support for your answer. Which theory of term structure have you supported in your answer?

Assume your required rate of return on the second year investment is 11 percent; otherwise, you will choose to go with the 2-year security. What rationale could you offer for your preference? "


THANKS!!

do your own homework. What is your final return assuming the 8% return for two year. Then boot strap the two individual bonds until you get the same amount of money. Any more or less and there is arbitrage.

A two year rate of 8% sounds high for government securities. High rate means high risk. I would take the two year rate of 8% cause it is higher than 6% and to try and get 11% is really pushing the risk level.

Jack, don't be so f*&king lazy. Do your own homework. You are presumably doing the course to help you so help yourself and do your own work.