Currently the term structure is as follows one-year bonds, Ask an Expert

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Currently, the term structure is as follows: One-year bonds yield 7.75%, two-year bonds yield 8.75%, three-year bonds and greater maturity bonds all yield 9.75%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 8.75%, once a year. You strongly believe that at year-end the yield curve will be flat at 9.75%.

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%

b. Which bond you would buy?

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