Types of financial investments, Financial Management

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Question:

(a) Give the four main types of financial investments and state the risks and bene ts associated to each type.

(b) (i) Let k(t; T; s) denotes the return at time t on a bond maturing at T under state s and consider the tree of weekly returns shown in Figure. Construct the tree of bond prices maturing at time 3 and hence ll in the missing returns.

2166_Types of fnancial investments.png

(ii) Find the evolution of the yields to maturity using the bond prices calculated in part (b)(i) for the one month period.


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