Currently, the term structure is as follows: One-year bonds yield 10.50%, two-year bonds yield 11.50%, three-year bonds and greater maturity bonds all yield 12.50%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 11.50%, once a year. You strongly believe that at year-end the yield curve will be flat at 12.50%.

a.	Calculate the one year total rate of return for the three bonds. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	One Year	Two Years	Three Years
One year total rate of return	%	%	%

b.

Which bond you would buy?

	One-year bond
	Two-year bond
	Three-year bond

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