Consider the following list of prices for zero-coupon bonds with face value of $1000 of various maturities.

Maturity (years) Bond price ($)

1 960

2 890

3 845

4 780

Suppose now you want to invest in zero coupon bond for 2 years, all the zero coupon bonds involved in this part have face value of $1000. Today's short rate is 5%. Here are two strategies:

(1) Hold 2-year maturity zero coupon bond until maturity (

2) Purchase a 3-year maturity zero coupon bond, and sell it at the end of second year. Your expected short rates in each year are given as followed: Time period (years)

Expected short rate

2 7%

3 6%

Which strategy will you choose? Explain.