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A person has 1000 now and plans to invest it for 5 years. He is trying to decide between two alternatives. The first is to buy a bond that matures in 5 years. The second is to buy a bond that matures in 10 years and sell it at the end of 5 years. Assume that in both cases the bonds have no payments before maturity and can be purchased today at an interest rate of 6%. How much better or worse off is the individual at the end of 5 years if he chooses the second alternative instead of the first, assuming that at time 5 the interest rate for this class of bonds is (a) 4%, (b) 7%?

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Statistics and Probability, Statistics

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