Reference no: EM133075361

Consider investment in three T-bonds. The first T-bond matures in six months, has an annualized coupon rate of 2 3 8 and trades at 99 : 8. The second T-bond bond matures in 12months, has an annualized coupon rate of 3 7 8 and trades at 99 : 2. The third T-bond bondmatures in 18 months, has an annualized coupon rate of 4 1 8 and trades at 99 : 24.1 Use theLaw of One Price to calculate discount factors, spot rates, and the forward rates 1f1 and 2f1. Now, assume that you hold all three bonds until time 2 and that you enter agreements tosell bonds not yet matured at their forward prices and to reinvest all interim cash flows, including those of bonds that reach maturity, at the current forward rates.Calculate the rates of return from investing in each of the three bonds.