You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%. You...

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Finance

You believe that 6 months from now, the 12-month treasury spotrate will be 7.00%. You believe that 1 year from now, the 6-monthtreasury spot rate will be 6.00%. You believe that 18 months fromnow, the 6-month treasury spot rate will be 5%. Given the treasuryspot rates below, which of the following strategies would generatethe highest return?
Term Spot Rate
6-month 4.00%
12-month 4.20%
18-month 4.50%
24-month 4.90%
30-month 5.40%
36-month 5.70%
42-month 6.00%
48-month 6.40%
Invest in an 18-month treasury.
Invest in a 12-month treasury, at maturity reinvest proceeds ina 6-month treasury.
Invest in a 6 -month treasury, at maturity reinvest proceeds ina 12-month treasury.
Invest in a 24-month treasury but sell 6-month prior tomaturity.
You are indifferent between all 3 strategies.

Term	Spot Rate
6-month	4.00%
12-month	4.20%
18-month	4.50%
24-month	4.90%
30-month	5.40%
36-month	5.70%
42-month	6.00%
48-month	6.40%

Answer & Explanation Solved by verified expert

4.4 Ratings (793 Votes)

Let us say that 10 is invested in each strategy now Invest in an 18month treasury Ending value of investment 100 1 18 month spot rate1812 100 1 00451812 10683 Invest in a 12month treasury at maturity reinvest See Answer

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