Question

The yields of four zero-coupon bonds of varying maturities are as follows:

Maturity	YTM
1	6.1%
2	6.2%
3	6.3%
4	6.4%

If you expect the implied term structure to be the same next year as it is this year, what is the expected return on the 1-year zero-coupon bond over the coming year? Please express your answer in percent, rounded to the nearest basis point.

Answer 1

what is the expected return on the 1-year zero-coupon bond over the coming year?

(1 + one year interest rate) * (1 + 1 year interest rate one year from now) = (1 + 2 year interest rate)^2

(1 + 0.061) * (1 + 1 year interest rate one year from now) = (1 + 0.062)^2

1.061 * (1 + 1 year interest rate one year from now) = 1.127844

(1 + 1 year interest rate one year from now) = 1.0630

1 year interest rate one year from now = 6.30%