Consider the Following Two Investment Alternatives for an Investor Who

question 9

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.

---

Definitions:

Least Cost

Refers to the most cost-effective method of producing a given level of output without sacrificing quality.

Horizontal Market

A market that meets a specific need across multiple industries, rather than being confined to a particular sector.

Natural Monopoly

A type of monopoly that arises due to high fixed or start-up costs associated with the business, making it efficient for only one provider to serve the entire market.

Antitrust Law

Laws designed to promote competition and prevent monopolies by regulating corporate practices that restrict trade.