Final answer:
An investor with a one-year horizon expecting a 6% yield to maturity should arrange their portfolio based on the current versus expected market interest rates, considering the coupon rate and face value of bonds, and the capital gains or losses that may result from changes in market rates.
Step-by-step explanation:
If an investor with a one-year investment horizon expects the yield to maturity on a one-year bond to be 6% next year, then the investor should arrange their portfolio by considering current market interest rates in relation to the expected bond yield.
For example, if a bond with a $1,000 face value and an 8% coupon rate is expected to make an $80 interest payment in the last year and market interest rates are expected to be 6%, this bond can be attractive as it would sell for more than its face value. On the contrary, if the market interest rates are above the bond's coupon rate, the bond would sell for less than its face value.
Therefore, the investor should evaluate the prevailing market conditions. If market interest rates are expected to rise above the bond's coupon rate, the investor might prefer to hold shorter duration bonds or invest in alternative assets to avoid capital losses.
Conversely, if market rates are expected to fall below the bond's coupon rate, then long-term bonds might be a more lucrative investment as they would appreciate in value.