In: Finance
Currently, the term structure is as follows: One-year bonds yield 12.00%, two-year bonds yield 13.00%, three-year bonds and greater maturity bonds all yield 14.00%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 13.00%, once a year. You strongly believe that at year-end the yield curve will be flat at 14.00%.
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 |