Treasury bills (induce to buy)
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The following pattern for one-year Treasury bills is expected over the next four years:
Year1, 3%
Year2, 5%
Year3, 6%
Year4, 7%
a. What return would be necessary to induce an investor to buy a two-year security?
b. What return would be necessary to induce an investor to buy a three-year security?
c. What return would be necessary to induce an investor to buy a four-year security?
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Solution Summary
The following pattern for one-year Treasury bills is expected over the next four years:
Year1, 3%
Year2, 5%
Year3, 6%
Year4, 7%
a. What return would be necessary to induce an investor to buy a two-year security?
b. What return would be necessary to induce an investor to buy a three-year security?
c. What return would be necessary to induce an investor to buy a four-year security?
Solution Preview
A) (3% + 5%) / 2 = 4% for a 2 yr. security.
B) (3% + 5% + 6%) / 3 = 4.66% for a 3 yr. ...
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