Invest for three years to earn the highest possible return

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Reference no: EM131305375

Suppose that you want to invest for three years to earn the highest possible return. You have three options:

(a) Roll over three one-year bonds, which pay interest rates of 8% in the first year, 11% in the second year, and 7% in the third year;

(b) buy a two-year bond with a 10% interest rate and then roll over the amount received when that bond matures into a oneyear bond with an interest rate of 7%; or

Assuming annual compounding, no coupon payments, and no cost of buying or selling bonds, which option should you choose?

Reference no: EM131305375

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