Suppose that your roommate wants to borrow money from you. He offers three repayment plans....
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Suppose that your roommate wants to borrow money from you. He offers three repayment plans. According to plan A, you lend him $800 now, and he repays you $1000 in two years. According to plan B, you lend him $800 now, and he repays you $500 in one year, and another $500 in two years. According to Plan C, you lend him $800 now, and he repays you $900 in one year. Which plan do you prefer? (or equivalently, which plan gives you the highest yield to maturity?)
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