The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 1 YTM (%) 6% 7 9 2 3 Required: a. What are the implied 1-year forward rates? b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next year? c. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 2-year zero-coupon bonds next year? d. If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over the next year? Ignore taxes. e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond? f. What should be the current price of a 3-year maturity bond with a 9% coupon rate paid annually? g. If you purchased the coupon bond at the price you computed in part (f), what would your total expected rate of return be over the next year (coupon plus price change)? Ignore taxes.

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 current yield curve for default-free zero-coupon bonds is as follows:
Maturity
(Years)
1
YTM (%)
6%
7
9
2
3
Required:
a. What are the implied 1-year forward rates?
b. Assume that the pure expectations hypothesis of the term structure is correct. If market
expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next
year?
c. Assume that the pure expectations hypothesis of the term structure is correct. If market
expectations are accurate, what will be the yield to maturity on 2-year zero-coupon bonds next
year?
d. If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over
the next year? Ignore taxes.
e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond?
f. What should be the current price of a 3-year maturity bond with a 9% coupon rate paid
annually?
g. If you purchased the coupon bond at the price you computed in part (f), what would your total
expected rate of return be over the next year (coupon plus price change)? Ignore taxes.
Transcribed Image Text:The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 1 YTM (%) 6% 7 9 2 3 Required: a. What are the implied 1-year forward rates? b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next year? c. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 2-year zero-coupon bonds next year? d. If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over the next year? Ignore taxes. e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond? f. What should be the current price of a 3-year maturity bond with a 9% coupon rate paid annually? g. If you purchased the coupon bond at the price you computed in part (f), what would your total expected rate of return be over the next year (coupon plus price change)? Ignore taxes.
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