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An investor is considering two alternative investments. The first alternative is to invest in an instrument that matures in two years. The second alternative is to invest in an instrument that matures in one year and at the end of one year, reinvest the proceeds in a one-year instrument. He believes that one-year interest rates one year from now will be higher than they are today and therefore is leaning in favor of the second alternative. What would you recommend to the investor?

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This solution is comprised of a detailed explanation to answer which investment alternative the investor should select.

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Investments

An investor is considering two alternative investments. The first alternative is to invest in an instrument that matures in two years. The second alternative is to invest in an instrument that matures in one year and at the end of one year, reinvest the ...

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