solution
solution.
The current yield curve for default-free zero-coupon bonds is as follows:
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Order Paper Nowa. What are the implied 1-year forward rates?
b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next year?
c. What about the yield on 2-year zeros?
d. If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes.
e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond?
f. What should be the current price of a 3-year maturity bond with a 12% coupon rate paid annually?
g. If you purchased the coupon bond at the price you computed in part (f ), what would your total expected rate of return be over the next year (coupon plus price change)? Ignore taxes.
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