Problem 6.11 You are considering investing $1,000 for a three-year period, begin
ID: 2788561 • Letter: P
Question
Problem 6.11 You are considering investing $1,000 for a three-year period, beginning January 1, 2018 and ending December 31, 2020. The market offers only zero-coupon bonds maturing in one, two or three years. Looking into your crystal ball, you see the following term structure by date of purchase Yield to Maturity 2-year bond 5% 6% Date of Purchase 1-year bond2-year bond3-year bond Januarv 1, 1996 3-year bond 3% | 396 January 1, 1997 | January 1, 1998 | 3% 3% What is the maximum possible accumulated value of your investment at the end of three years, assuming that you hold any bonds that you buy until maturity?Explanation / Answer
Value of Investment = $1,000
Investor get maximum value when he invest for one year at 4%in January 1, 1996 and investor 2 year at 6% on january 1, 1997.
Maximum value after 3 year = $1,000 × (1 + 4%) × (1 + 6%) ^ 2
= $1,040 × 1.1236
= $1,168.54.
Maximum Value of investment after three year will be $1,168.54.