Bonds

Working for GLB Ltd. Treasury Division, an Australian exporter of airport surveillance systems, one day you are asked to find an avenue to invest your company’s surplus funds over one year. Based on the in-house research, your company anticipates a 1% increase in the curve in six months. The 6-month and 1-year zero-coupon rates are respectively 3% and 3.2%. After doing some research yourself, you find two different opportunities:  your company can buy the 1-year zero-coupon T-bond and hold it until maturity;  or your company can choose a rollover strategy by buying the 6-month T-bill, holding it until maturity, and buying a new 6-month T-bill in six months, and holding it until maturity. 1. Calculate the annualized total return rate of these two strategies assuming that your company’s anticipation is correct. 2. Same question when interest rates decrease by 1% after six months.