The term structure for zero-coupon bonds is currently: Next year at this time, y

Question

The term structure for zero-coupon bonds is currently: Next year at this time, you expect it to be: What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? (Round your answers to 2 decimal places. Omit the "%" sign in your response.) Rate of return % 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? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Is the market's expectation of the return on the 3-year bond greater or less than yours?

Explanation / Answer

a. From the above table, the rate of return over the coming year on a 3-year zero coupon bond would be = 8.9%

b-1. 1-year zero coupon bond YTM = [(1 + 6.9%)2 / (1 + 5.9%)] - 1

= 7.91%

2-year zero coupon bond YTM = [(1 + 7.9%)3 / (1 + 5.9%)]1/2 - 1

= 8.91%

b-2. Greater

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.