M & B 4th Edition by Dean Croushore

Exercise 5

You are given the following information on the bond market: Money available on January 1, 2011: $1,000 Interest rates on January 1, 2011, 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 _ 1.0553 at maturity. Expected future interest rates on one-year bonds:
January 1, 2012 6.5 percent
January 1, 2013 7 percent
January 1, 2014 9 percent
Investment horizon: 4 years, ending
January 1, 2015
What should an investor buy to yield the largest stream of expected income over the period from January 1, 2011, to January 1, 2015?