We will borrow $1,000 at a five-yea

We will borrow $1,000 at a five-year loan rate of 2.5% and buy a four-year strip paying 4%. We may not know what interest rates we will earn on the last year, but we can put it under our mattress earning 0 percent, if necessary, to pay off the loan when it comes due.Using the information from problem 25, the cost of the strip will be $1,000 × .8548 = $854.80. The proceeds from the 2.5 percent loan = $1,000 / (1.025)5 = $883.85. We can pocket the difference of $29.05, smile, and repeat.The minimum sensible value would be to set the discount factor used in year 5 equal to that of year 4, which would assume a 0 percent interest rate for year 5. We can solve for the interest rate where 1 / (1 + r)5 = .8548, which is roughly 3.19%.