As a portfolio manager for an insurance company, you are about to invest funds i

Question

As a portfolio manager for an insurance company, you are about to invest funds in one of three possible investments:

a. 10-year coupon bonds issued by the U.S. Treasury,

b. 20-year zero-coupon bonds issued by the Treasury, or

c. One-year Treasury securities.

Each possible investment is perceived to have no risk of default. You plan to maintain this investment for a one-year period. The return of each investment over a one-year horizon will be about the same if interest rates do not change over the next year. However, you anticipate that the U.S. inflation rate will decline substantially over the next year, while most of the other portfolio managers in the United States expect inflation to increase slightly.

a. If your expectations are correct, how will the return of each investment be affected over the one-year horizon?

b. If your expectations are correct, which of the three investments should have the highest return over the one-year horizon and why?

Explanation / Answer

a) if my expectations are correct then the price of all the securities should rise now

b)one-year Treasury securities will have highest return if my expectations are correct because it has least maturity period and also for other 2 options maturity period is very high means inflation may rise later

c) if i cant predict that what will be inflation rate after one year then i might not go with highest retun giving option because if after that inflation is high and also also other economic condition changes then i might have to spend more money next year to get good return for future

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