You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%....
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You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. You believe that 18 months from now, the 6-month treasury spot rate will be 5%. Given the treasury spot rates below, which of the following strategies would generate the 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 in a 6-month treasury.
- Invest in a 6 -month treasury, at maturity reinvest proceeds in a 12-month treasury.
- Invest in a 24-month treasury but sell 6-month prior to maturity.
- You are indifferent between all 3 strategies.
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