(Term structure of interest rates) you want to invest your savings of 20,000 in government securities for the next two years. Currently, you can invest either in a security that pays interest of 8.0% per year for the next two years Ornish you Curity that matures in one year but pays only 6% interest if you make the latter choice, you will then be investor savings at the end of the first year for another year.
A. Why might you choose to make the investment in the one your security that pays an interest rate of only 6%, as opposed to investing in the to your security paying 8%? Provide numerical support for your answer. Which theory of term structure have you supported in your answer?
If you choose the 2-year security, the value of your savings after the second year will be?
B. Assume your required rate of return on the second-year investment is 11.0 percent; otherwise, you will choose to go with the 2-year security. What rationale could you offer for your preference?