Question

The maturities and yields of three zero-coupon bonds are as follows: Maturity YTM 1 4% 2...

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.

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