Rate Anticipation swap (reinvest)
A two-year Treasury strip has a yield of 4.4%, and the three Treasury strip has a yield of 5.29%. Marry thinks the one-year interest rate will be 5.04% in two years, and she willing to put her money where her mouth is. (Assume that all securities are zero-coupon securities, and that market participates can lead and borrow at the same rate)
A) What is the price of the two-year Treasury strip? $
B) What is the price of the three-year Treasury strip? $
C) If Marry buys the two years Treasury and reinvests the proceeds from the two-year Treasury into a one-year Treasury, then how many two-year Treasuries does Marry need to buy today if she wants $1,000 in three years?
% (Answer as a percent of $1,000 par value)
D) If Marry wants $1,000 in three years, how much money would Marry needs to spend on the two-year Treasury if she expects to roll the proceeds over in the second year at 5.04%?
E) According to the expectation hypotheses, what rate does the market expect the one-year rate will be in two years?