Compute return on each of investments-annual compounding

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Reference no: EM13771026

You have $1000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (a) a sequence of three one year bonds (b) a three year bond or (c) a two year bond followed by a one year bond. The current yield curve tells you that the one year, two year, and three year yields to maturity are 3.5 percent, 4.0 percent, and 4.5 percent respectively. You expect that one year interest will be 4 percent next year and 5 percent the year after that. Assuming annual compounding.

a. Compute the return on each of the three investments.

b. Based on your answer to (a.) discuss which one you would choose.

Reference no: EM13771026

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