A Two-Year STRIPS Sells at an Interest Rate of 3

question 89

Multiple Choice

A two-year STRIPS sells at an interest rate of 3.84% and a three-year STRIPS sells at a rate of 3.97%. What is the implied one-year interest rate two years from now? Assume the rates are effective annual rates.

• A)4.23%
• B)4.36%
• C)4.41%
• D)4.45%
• E)4.50%

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Definitions:

Risk-and-return Requirements

The expected level of return on an investment, given the risk the investor is willing to assume.

Capital Gains Tax

Tax on the profit made from the sale of an asset, which could range from stocks to real estate, varying based on the duration the asset was held and the seller's tax filing status.

Tax Shelter

Financial strategies or instruments used to minimize or avoid taxes legally, often through investments in government securities, retirement accounts, or real estate.

Investment Growth

The increase in the value of an investment, accomplished through rising asset prices and reinvestment of dividends or interest.