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You have $1,000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (Ja
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Answer #1

(i)

Expected return = (1 + current 1-year yield) * (1 + 1-year interest rate after 1 year) * (1 + 1-year interest rate after 2 years) - 1

Expected return = (1 + 2.5%) * (1 + 5%) * (1 + 5%) - 1

Expected return = 13.01%

(ii)

Expected return = (1 + current 3-year yield)3 - 1

Expected return = (1 + 2.7%)3 - 1

Expected return = 8.32%

(iii)

Expected return = (1 + current 2-year yield)2 * (1 + 1-year interest rate after 2 years) - 1

Expected return = (1 + 4%)2 * (1 + 5%) - 1

Expected return = 13.57%

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