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Currently, the term structure is as follows: One-year bonds yield 7%, two-year zero-coupon bond yield 8%, three-year- and longer-maturity zero-coupon bonds all yield 9%. You
Currently, the term structure is as follows: One-year bonds yield 7%, two-year zero-coupon bond yield 8%, three-year- and longer-maturity zero-coupon bonds all yield 9%. You are choosing between one-,two-, and three-year maturity bonds all paying annual coupons of 8%. Which bond will provide the highest rate of return if at year-end the yield curve will be flat at 9%?
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