Multiple Choice
Consider the following two investment alternatives for an investor who has a one-year investment horizon. For Alternative 1, the investor buys a one-year instrument. For alternative 2, the investor buys a six-month instrument and when it matures in six months the investor buys another six-month instrument. Which of the below statements is FALSE?
A) Given the one-year spot rate, there is some rate on a six-month instrument one year from now that will make the investor indifferent between the two alternatives.
B) With Alternative 1, the investor will realize the one-year spot rate and that rate is known with certainty.
C) With Alternative 2, the investor will realize the six-month spot rate, but the six-month rate six months from now is unknown.
D) For Alternative 2, the rate that will be earned over one year is not known with certainty.
Correct Answer:
Verified
Correct Answer:
Verified
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