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For yearly spot rates (6%, 8%, 10%) we assume that the interest rates evolve according to...

For yearly spot rates (6%, 8%, 10%) we assume that the interest rates evolve according to expectations dynamics. a) You invest 1000 USD into a 3 year zero coupon bond. What will be the final value of that investment? b) You invest 1000 USD into a 1 year zero coupon bond. What will the value of that investment after one year? You invest that money again into a 2 year zero-coupon bond. What will be the final value of that investment?
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Answer #1

a) Since the 3 year spot rate is 10%

If I invest 1000 USD in a 3 year zero coupon bond, the final value of the investment will be 1000*(1+0.10)3=1331$ (Since the 3 year spot rate is 10%)

Therefore the final value of this investment will be 1331$

b) If we invest 1000 USD in a 1 year bond first, we will get 1000*(1.06) after first year=1060$

If we invest this 1060 USD in a 2 year bond, we get 1060(1.08)2=1236.384 (Since the 2 year spot rate is 8%)

Therefore the final value of this investment will be 1236.38$

Hope it helps. Do ask for any clarifications required.

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