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Currently, the term structure is as follows: One-year bonds yield 12.00%, two-year bonds yield 13.00%, three-year...

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

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 3 years ago
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