Problem 15-10

The term structure for zero-coupon bonds is currently:

Maturity (Years)	YTM(%)
1	4.8	%
2	5.8
3	6.8

Next year at this time, you expect it to be:

Maturity (Years)	YTM(%)
1	5.8	%
2	6.8
3	7.8

a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? (Round your answer to 1 decimal place.)

b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.)

b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours?

multiple choice

• Greater

• Less