Reference no: EM132509805

Suppose that an investor is concerned about the value of her investments over the short-term. She is considering one of two investment choices:

(Option 1): Invest in 1-year U.S. government bonds, hold them to maturity, and then reinvest the proceeds to new 1-year bonds (25 consecutive times until retirement). If her employment contract is terminated in a given year, then she will not reinvest the proceeds.

(Option 2): Invest in 25-year U.S. government bonds today. If her employment is terminated in a given year, then she will sell the bond prior to maturity.

You can assume that the U.S. government cannot default on its debt obligations and that interest rates are expected to remain positive in the future. If these assumptions hold, then which of the following statements is correct:

A. Option 1 corresponds to a risk-free investment.

B. Option 2 corresponds to a risk-free investment

C. The return earned by the investor on Option 1 is uncertain, you expect to make a positive return on average, but you may earn a negative return in some years.

D. The return earned by the investor on Option 1 will always be positive, but there is uncertainty about how much an investor can earn in any given year.