Currently, the term structure is as follows: One-year bonds yield 11.75%, two-year bonds yield 12.75%, three-year bonds and greater maturity bonds all yield 13.75%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 12.75%, once a year. You strongly believe that at year-end the yield curve will be flat at 13.75%.
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?