Question

The maturities and yields of three zero-coupon bonds are as follows:

Maturity	YTM
1	4%
2	5%
3	6%

Next year, you expect the yields on zero-coupon bonds to be as follows:

Maturity	YTM
1	5%
2	6%
3	7%

What is the market's expectation of the rate of return on a 3-year zero-coupon bond over the coming year, assuming the expectations hypothesis holds? Please express your answer in percent rounded to the nearest basis point.

Answer 1

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