Problem $11-27($Algo$)$

Currently, the term structure is as follows: One$-$year bonds yield $11\mathrm{.}00\%,$ two$-$year zero$-$coupon bonds yield $12\mathrm{.}00\%,$ three$-$year and

longer maturity zero$-$coupon bonds all yield $13\mathrm{.}00\%.$ You are choosing between one, two, and three$-$year maturity bonds all paying

annual coupons of $12\mathrm{.}00\%.$ You strongly believe that at year$-$end the yield curve will be flat at $13\mathrm{.}00\%.$

Required:

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.$)$

Answer is not complete.

b$.$ Which bond you would buy?

One$-$year bond

Two$-$year bond

Three$-$year bond