Question: Assume that expectation hypothesis theory holds. Assume that the expected yield for a one-year zero coupon bond next year is E[y_t+1(1)] = 4% and the

Assume that expectation hypothesis theory holds. Assume that the expected yield for a one-year zero coupon bond next year is E[y_t+1(1)] = 4% and the yield for a one-year zero coupon bond today is y_t(1) =2% .

a) Show the HPR of an investor who buys a one-year zero coupon bond and hold until maturity

b) Show the HPR of an investor who buys a two-year zero coupon bond, and sell after 1 year.

c) What happens if the expectations of next year's one-year rate change from 4% to 6%. What is the new y_t(2) (the yield for a two-year zero coupon bond)?

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