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Q.27I

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Essentials Of Investments
Found in: Page 362
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

Currently, the term structure is as follows: One-year bonds yield 7%, two-year bonds yield 8%, three-year bonds and greater maturity bonds all yield 9%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 8%, once a year. Which bond should you buy if you strongly believe that at year-end the yield curve will be flat at 9%?

Answer

Three year maturity bond

See the step by step solution

Step by Step Solution

Step by Step Solution Step 1: Calculation of holding period return

Step 2: Explanation on choice between one year, two year and three year bond

From the table above, it is apparent that the three year bond would give 9% holding period return which is the highest amongst all. Hence one should buy this.

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