Joe has two investment opportunities. He can buy a two-year security today, hold onto it for two years, and then cash it in. The interest rate on the two-year security is 8%. Or Joe can buy a one-year security today. At the end of the year he can cash in the one-year security and buy another one-year security. The interest rate on the first one-year security is 7%. Explain under what circumstances it would be preferable for Joe to:
(a) buy the two-year security;
(b) buy the two one-year securities.
(c) Under what circumstance would Joe be indifferent between the two-year security and the two one-year securities?

Question

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The Answer of Joe has two investment opportunities. He can buy a two-year security today, hold onto it for two years, and then cash it in. The interest rate on the two-year security is 8%. Or Joe can buy a one-year security today. At the end of the year he can cash in the one-year security and buy another one-year security. The interest rate on the first one-year security is 7%. Explain under what circumstances it would be preferable for Joe to:
(a) buy the two-year security;
(b) buy the two one-year securities.
(c) Under what circumstance would Joe be indifferent between the two-year security and the two one-year securities?

Joe Has Two Investment Opportunities