Computing Interest on Bonds John invested surplus cash by paying $751.30 to purchase a series Z savings bond that pays no interest annually but matures at $1,000 in three years. The bondholder will earn 10 percent interest compounded annually.

a. What amount of interest will John’s investment earn in each of the three years?

b. At the end of the second year, John needs cash and can either redeem his bond for $900 or can borrow $900 at a 12 percent annual rate. Which of the two options should he choose? Explain why.