Youre considering investing in a 2-year 7% annual coupon bond priced at par. Alternatively, youll consider a 1-year 5% annual coupon bond priced at par and subsequently reinvesting all your proceeds in another identical 1-year bond. You expect the 1-year bond will yield 9% next year. Assuming you turn out to be right, which approach would generate the higher return?

• Invest in the 2-year bond.
• Invest in the 1-year and reinvest the proceeds in another 1-year.