Calculate rate that you would need to earn on year security

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Reference no: EM131981373

Assume you want to invest your savings of $1,000 in government securities for the next 2 years. Currently you can invest either in a security that pays interest of 6% per year for the next 2 years or in a security that matures in 1 year buy pays only 7%. If you make the latter choice, you would need to reinvest your savings at end of the first year for another year. Calculate the rate that you would need to earn on the one-year security next year to be indifferent between these two investment opportunities. (Enter percentages as decimals, e.g. 5% is 0.05; round to 3 decimals)

Reference no: EM131981373

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