Question
Currently, the term structure is as follows: One-year bonds yield 8.50%, two-year zero-coupon bonds yield 9.50%, three-year and longer maturity zero-coupon bonds all yield 10.50%.
Currently, the term structure is as follows: One-year bonds yield 8.50%, two-year zero-coupon bonds yield 9.50%, three-year and longer maturity zero-coupon bonds all yield 10.50%. You are choosing between one, two, and three-year maturity bonds all paying annual coupons of 9.50%. You strongly believe that at year-end the yield curve will be flat at 10.50%.
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 year, three year ?
b. Which bond you would buy? One-year bond Two-year bond Three-year bond
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