Reference no: EM132585321

You have $1,000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (i) a sequence of three one-year bonds; (ii) a three-year bond; or (iii) 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 2.5%, 4%, and 2.7% respectively. You expect that one-year interest rates will be 5% next year and 5% the year after that. Assuming annual compounding, compute the return on each of the three investments.

Instructions: Enter your responses rounded to the nearest two decimal places.

Expected return for (i) = ____________ %

Expected return for (ii) = ____________ %

Expected return for (iii) = ____________ %

I came up with:
2.50%
3.06%
3%