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?
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
Problem 1PS
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Question
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?
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