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? A. Greater B. Less

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 4.5 %
2 5.5  
3 6.5  
 

 

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

 

Maturity (Years) YTM (%)
1 5.5 %
2 6.5  
3 7.5  
 

 

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?

A. Greater
B. Less
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