Currently, the term structure is as follows: One-year bonds yield 10.25%, two-year zero-coupon bonds yield 11.25%, three-year and longer maturity zero-coupon bonds all yield 12.25%. You are choosing between one, two, and three-year maturity bonds all paying annual coupons of 11.25%. You strongly believe that at year-end the yield curve will be flat at 12.25%. a.

Calculate the one year total rate of return for the three bonds

Which bond you would buy?

• One-year bond

• Two-year bond

• Three-year bond