What is two-year holding period yield from buying one-year

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Assume the current yield curve is as follows:

Maturity (years)   Yield

1                    3.300%

2                    4.300%

3                   5.500%

Assuming semi-annual compounding and that zero coupon bonds of all maturities are available, an investor wants to 'ride' the yield curve and considers the following strategies:

i. Buying a 2 year zero coupon bond today and holding it until maturity

ii. Buying a 3 year zero coupon bond today and selling it in two year's time

Problem (a): What is the 2-year holding period yield from buying a two-year bond today and holding it to maturity?

Problem (b): What is the 2-year holding period yield from buying a three-year bond today and selling it in two year's time?

Problem (c): Assume that in one year's time, the yield curve will shift upwards by 0.50%. What is the 2-year holding period yield from buying a one-year bond today, holding it to maturity and then buying another one-year bond and holding it to maturity?

Reference no: EM132934196

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