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5. Suppose the annualized spot rates are as follows ( 60 points) 6 months 2% 12 months 4% (a) Calculate the price of the 6-month Treasury bill with the par value of $100 and the price of the 12-month (zero-coupon) Treasury bill with the par value of $100. Note that the interest is compounded every six months. (b) An investor has an investment horizon of 6 months. He can invest his money in two ways. First, buy the 6-month Treasury bill and hold it until maturity. Second, buy the 12-month Treasury bill and hold it for 6 months. The investor believes that the spot rates will stay the same 6 months from now. Which investment strategy should the investor choose if he prefers high expected holding period returns? (c) If 6 month from now the then 12-month spot rate increases to 9% and the then 6-month spot rate increases to 8%, what are the realized holding period returns on the two investment strategies? (d) What are the potential risks associated with the riding the yield curve strategy? 5. Suppose the annualized spot rates are as follows ( 60 points) 6 months 2% 12 months 4% (a) Calculate the price of the 6-month Treasury bill with the par value of $100 and the price of the 12-month (zero-coupon) Treasury bill with the par value of $100. Note that the interest is compounded every six months. (b) An investor has an investment horizon of 6 months. He can invest his money in two ways. First, buy the 6-month Treasury bill and hold it until maturity. Second, buy the 12-month Treasury bill and hold it for 6 months. The investor believes that the spot rates will stay the same 6 months from now. Which investment strategy should the investor choose if he prefers high expected holding period returns? (c) If 6 month from now the then 12-month spot rate increases to 9% and the then 6-month spot rate increases to 8%, what are the realized holding period returns on the two investment strategies? (d) What are the potential risks associated with the riding the yield curve strategy

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