Question

You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 5.6 % 2-year zero-coupon...

You observe the following term structure:

Effective Annual YTM
1-year zero-coupon bond 5.6 %
2-year zero-coupon bond 5.7
3-year zero-coupon bond 5.8
4-year zero-coupon bond 5.9


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.)



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

  • 1-year zero-coupon bond

  • 4-year zero-coupon bond

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