The term structure for zero-coupon bonds is currently: Maturity (Years) YTM (%) 1 5.2% 2 6.2 3 7.2 Next year at this time, you expect it to be: Maturity (Years) YTM (%) 1 6.2% 2 7.2 3 8.2 Required: What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? 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? Is the market's expectation of the return on the 3-year bond greater or less than yours?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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The term structure for zero-coupon bonds is currently:

Maturity (Years) YTM (%)
1 5.2%
2 6.2
3 7.2

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

Maturity (Years) YTM (%)
1 6.2%
2 7.2
3 8.2

Required:

  1. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond?

  2. 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?

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

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