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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?
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