Currently, the term structure is as follows: One-year bonds yield 7%, two-year bonds yield 8%, three-year bonds and greater maturity bonds all yield 9%. You are choosing between one, two, and three year maturity bonds all paying annual coupons of 8%, once a year. You strongly believe that at year-end the yield curve will be flat at 9%.

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