1. (Forward rate and Expectation Hypothesis) The current yield curve for (default-free) zero-coupon bonds issued by real estate companies is as follows: Maturity (Years) Yield to Maturity, YTM (% (Express your answers in 4 decimal points if necessary) (a) Compute the three 1-year forward rates, 11.12.13? (6 marks) Assume in the following question that the pure expectations hypothesis of the term structure is correct and market expectations are accurate. (b) What will be the yields to maturity on 1- and 2-year zero coupon bonds to be Issued next year? If you purchase a 3-year zero-coupon bond now, compute the expected total rate of return if you sell it next year. (9 marks) (c) What should be the current price of a 3-year maturity bond with a 6% coupon rate paid annually? If you purchased it at that current price, what would be your (annualized) total expected rate of return if you sell it by the end of Second year after collecting the second coupon)? (Hint: let the face value be 1000) (9 marks) Consider again the above 3-year maturity bond with a 6% coupon rate paid annually. What is its modified duration? By using duration rule, what is the percentage change in the bond price if the interest rate increases by 0.25%? What is the percentage error of that rule? (9 marks) 1. (Forward rate and Expectation Hypothesis) The current yield curve for (default-free) zero-coupon bonds issued by real estate companies is as follows: Maturity (Years) Yield to Maturity, YTM (% (Express your answers in 4 decimal points if necessary) (a) Compute the three 1-year forward rates, 11.12.13? (6 marks) Assume in the following question that the pure expectations hypothesis of the term structure is correct and market expectations are accurate. (b) What will be the yields to maturity on 1- and 2-year zero coupon bonds to be Issued next year? If you purchase a 3-year zero-coupon bond now, compute the expected total rate of return if you sell it next year. (9 marks) (c) What should be the current price of a 3-year maturity bond with a 6% coupon rate paid annually? If you purchased it at that current price, what would be your (annualized) total expected rate of return if you sell it by the end of Second year after collecting the second coupon)? (Hint: let the face value be 1000) (9 marks) Consider again the above 3-year maturity bond with a 6% coupon rate paid annually. What is its modified duration? By using duration rule, what is the percentage change in the bond price if the interest rate increases by 0.25%? What is the percentage error of that rule? (9 marks)