Suppose that you have $1,000 to invest in the bond market on January 1, 2014. You could buy a one-year bond with an interest rate of 4%, a two-year bond with an interest rate of 5%, a three-year bond with an interest rate of 5.5%, or a four-year bond with an interest rate of 6%. You expect interest rates on one-year bonds in the future to be 6.5% on January 1, 2015, 7% on January 1, 2016, and 9% on January 1, 2017. You want to hold your investment until January 1, 2018.

Which of the following investment alternatives gives you the highest return by 2018:

(a) Buy a four-year bond on January 1, 2014;

(b) buy a three-year bond January 1, 2014, and a one-year bond January 1, 2017;

(c) buy a two-year bond January 1, 2014, a one-year bond January 1, 2016, and another one-year bond January 1, 2017; or

(d) buy a one-year bond January 1, 2014, and then additional one-year bonds on the first days of 2015, 2016, and 2017?