It is $2017$ now. The current term structure of spot rates is given below:

Assume annual compounding and annual coupon payments.

Part $($a$)$

What are the $1-$year forward rates for $2018$ and $2019?$

Part $($b$)$

What are the $1-$year spot rates in $2018$ and $2019$ implied by the Expectations Hypothesis?

The actual market expectations for $1-$year spot rates in $2018$ and $2019$ are $50$ basis points higher than what you have

determined in in the previous part.

Difference

$0\mathrm{.}50\%$

Calculate the $1-$year spot rates in $2018$ and $2019$ using the actual market expectations.

Expected $1-$year

Spot Rate $($Market$)$

$2018$

$2019$

Is there an arbitrage opportunity?

Answer:

Why?

Calculate the forward premium at $2-$ and $3-$year horizons by comparing the forward rates to the expected future short$-$

term spot rates $($use the actual market expectations$).$

Calculate the risk premium at $2-$ and $3-$year horizons by comparing long$-$term spot rates and expected short$-$term spot

rates $($use the actual market expectations$).$

Is the risk premium negative$/$zero$/$positive$?$

Answer:

Why?

Answer:

Part $($e$)$

You are going to buy a $2-$year zero$-$coupon bond with a face value of $$100$ now in $2017,$ and sell it in one year.

Compute the expected total return on your investment strategy $($use the actual market expectations$).$

Compute the term premium by comparing the expected return on the long$-$term bond and the current short$-$term spot rat

Term premium

Is the expected $($total$)$ return greater than$/$equal to$/$smaller than the current $1-$year spot rate?

Answer:

Why?

Answer: please solve each part of problem