Question: Currently, the term structure is as follows: 1-year bonds yield 7%, 2-year bonds yield 8%, 3-year bonds and longer maturity bonds all yield 9%. An investor is choosing between 1-, 2-, or 3-year maturity bonds all paying coupons of 8% annually, with par value of 1,000.

a) Which bond is most profitable if it is strongly believed that at year-end the yield curve will be flat at 9%?