The term structure for zero-coupon bonds is currently: Maturity (Years) YTM (%) 1 .............4% 2 .............5 3

Question:

The term structure for zero-coupon bonds is currently:

Maturity (Years) YTM (%)
1 .............4%
2 .............5
3 .............6
Next year at this time, you expect it to be:

Maturity (Years) YTM (%)
1 .............5%
2 .............6
3 .............7
a. What do you expect the rate of return to be over the coming year on a 3-year zero bond?
b. Under the expectations theory, what yields to 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?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...