M&B3 3rd Edition by Dean Croushore

Exercise 19

You are given the following information on the bond market:
Money available on January 1, 2013: $1,000
Interest rates on January 1, 2013, on bonds of different maturities: one year, 4 percent; two years, 5 percent; three years, 5.5 percent; four years, 6 percent
Note: Consider these to be bonds that compound the interest at the rate given, that is, the three-year bond pays $1,000 × 1.055 3 at maturity.
Expected future interest rates on one-year bonds:
January 1, 2014: 6.5 percent
January 1, 2015: 7 percent
January 1, 2016: 9 percent
Investment horizon: four years, ending January 1, 2017
What should an investor buy to yield the largest stream of expected income over the period from January 1, 2013, to January 1, 2017