An investor wishes to ride the yield curve to higher profits on an investment of $1,000. He observes in the market a zero coupon T note with one year left to maturity yielding 5 percent and another zero coupon T note yielding 7 percent with two years to maturity.

An investor wishes to ride the yield curve to higher profits on an investment of $1,000. He observes in the market a zero coupon T note with one year left to maturity yielding 5 percent and another zero coupon T note yielding 7 percent with two years to maturity. What investment strategy should he pursue? Show how this investment strategy would be superior to a simple buy and hold strategy. Under what conditions will this strategy succeed? When will it fail?








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