Determine how you derived your solutions

Reference no: EM132208384

Question: Suppose a 6-year timeframe where the interest rate for the first 2 years is 10%, the interest rate for the next 2 years is 12% and the interest rate for the final 2 years is 4%. We want to compare the final cash position that would result form some different savings plans. For simplicity assume that all the assets described below share the same risk levels, and the return of all these assets are described by the rates given above.

You will need to show your work so I can see how you derived your solutions.

Option A) Put $1000 into a 6 year zero-coupon bound (no coupon payments) at fair market-value and hold until maturity

Option B) Put $1000 into a 6 year coupon bond and hold until maturity, re-investing all the coupon payments into a saving account that pays according to the rates described above.

Option C) put $1000 into a 6 year zero- coupon bond, hold for 2 years, sell in secondary market immediately after the rate increases to 12%.

Take the funds from the sale and purchase a 4-year coupon bond, re-investing the coupon payment into a savings account( note that the bond price will not be a while number and neither will the coupons, which is fine since the values represent you share' of a much larger investment). You then sell this bond into the secondary market immediately after the rate changes to 4%(and this is also immediately after receiving the 2nd coupon payment). Take the funds form this sale and purchase a two-year zero-coupon bond and hold until maturity.

Reference no: EM132208384

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