Question: (20 points) The current yield curve for default free zero coupon bonds is as follows: Maturity (Years) 1 2 3 YTM 8% 9% 10% A.

(20 points) The current yield curve for default free zero coupon bonds is as follows: Maturity (Years) 1 2 3 YTM 8% 9% 10% A. What are the implied one-year forward rates for the years 2 and 3? (5 points) Problem 1 (continued) B. What will the pure yield curve (that is, the yield to maturity on one and two year zero coupon bonds) be next year? (5 points) C. The market price of a security is $50. Its expected rate of return is 13%. The risk- free rate is 4% and the market risk premium is 6%. What will be the market price of the security if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. (10 points)

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