Currently, the term structure is as follows: 1-year zero-coupon bonds yield 7%; 2-year zerocoupon bonds yield 8%; 3-year and longer-maturity zero-coupon bonds all yield 9%. You are choosing between 1-, 2-, and 3-year maturity bonds all paying annual coupons of 8%.

a. What is the price of each bond today?

b. What will be the price of each bond in one year if the yield curve is flat at 9% at that time?

c. What will be the rate of return on each bond? P-963