Problem:
You want to invest your savings of $30,000 in government securities in for the next two years.Currently,youcan invest either in a security that pays 8.1 percent per year for two years. Or in a security that matures in 1 year but pays 6.3 percent interest if you make the latter choice you would then invest your savings at the end of the first year for another year.
Required:
Question 1: Why might you choose the to make an investment in the 1-year security.Which theory of term structure have you supported in your answer?
Question 2: Assume your required rate of return on the second year investment is 10.9 percent,otherwise you would go with the 2 year security. What rationale could you offer for your preference?
Question 3: If you choose the 2-year security the value of your savings after the second year would be?
Note: Please describe comprehensively and provide step by step solution.