1. You have $5,000 to invest. You have two choices of how to invest. Choice “A” would have you invest at 5% per year for two years. Choice “B” would have you invest at 4.75% for the first year and then re-invest the proceeds for another year. What rate of return would you need to earn on the second year of Choice “B” to make you expect to earn the same return as for Choice “A”?
2. Calculate the duration for the following U.S. Treasury Note. While the note was originally issued with a seven-year maturity, it currently has 2 years left to maturity. The Note pays interest semi-annually and has a 2.40% coupon rate. The market’s required return on the Note is 2.10%.