Question: A 2-year, zero-coupon bond offers 8% per annum while a 1-year, zero coupon bond offers 6%. Should the expectations hypothesis hold, what will be the

  1. A 2-year, zero-coupon bond offers 8% per annum while a 1-year, zero coupon bond offers 6%. Should the expectations hypothesis hold, what will be the one-year rate on bonds one year from now?
  2. now suppose that the 1-year ZC bond is expected to have the same interest rate next year as it does now. What is the associated term premium for a 1-year bond maturing in 2 years?
  3. Now invoke the Risk-neutral valuation relationship and give the martingale probability associated with the 1year bond maturing in two years. (1 point) describe the preferred habitat theory and give your own, unique scenario where segmented markets could hold.

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