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Assume the following yield curve: one-year bonds yield 5%, two-year bonds yield 6.5%, three-year bonds and bonds with longer maturities all yield 8%. You can
Assume the following yield curve: one-year bonds yield 5%, two-year bonds yield 6.5%, three-year bonds and bonds with longer maturities all yield 8%. You can choose to invest between one-, two-, and three-year maturity bonds all paying annual coupons of 6% once a year, with a principal value of 1,000.
What is the maturity of the bond that you should invest your money in if you expect that the yield curve will be at at 7% at year-end?
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