Homework Answers
Selling the 1 year zero coupon bond and buying 2-year zero bond.
We have a net Investment in this.
We are selling a $1000 1 year zero coupon bond of 10% YTM
Proceeds = 1000/(1.10) = 909.09
We are investing in a 2 year zero coupon Bond at 8% YTM
= 909.09(1.08)^2
= $1060.36
So we have a net return of (1060-1000)/1000 = 6%
Answer: A. 1 year forward investment @ 6%
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