Question
You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 6.1 % 2-year zero-coupon...
You observe the following term structure:
| Effective Annual YTM | ||
| 1-year zero-coupon bond | 6.1 | % |
| 2-year zero-coupon bond | 6.2 | |
| 3-year zero-coupon bond | 6.3 | |
| 4-year zero-coupon bond | 6.4 | |
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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