Question

You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 6.3 % 2-year zero-coupon...

You observe the following term structure:

Effective Annual YTM
1-year zero-coupon bond 6.3 %
2-year zero-coupon bond 6.4
3-year zero-coupon bond 6.5
4-year zero-coupon bond 6.6

a. If you believe that the term structure next year will be the same as today’s, calculate the return on (i) the 1-year zero and (ii) the 4-year zero. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

One year return on 1-year bond %
One year return on 4-year bond %

b. Which bond provides a greater expected 1-year return?

  • 1-year zero-coupon bond

  • 4-year zero-coupon bond

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