Question

The term structure for zero-coupon bonds is currently: Maturity (Years) YTM(%) 1 5.0 % 2 6.0...

The term structure for zero-coupon bonds is currently:

Maturity (Years) YTM(%)
1 5.0 %
2 6.0
3 7.0


Next year at this time, you expect it to be:

Maturity (Years) YTM(%)
1 6.0 %
2 7.0
3 8.0


a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? (Round your answer to 1 decimal place.)



b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.)



b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours?

  • Greater

  • Less

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