The annualized continuously compounded yields on 1, 2, 3, 4 and 5 year zero coupon bonds are currently 3.5%, 4.2%, 4.7%, 5.3% and 5.7%, respectively. All bonds have face values of $1000. The bonds are risk free. a) Compute the current prices on each of the five zero coupon bonds. b) Suppose the term structure is expected to be the same one year from now. i) What do you expect the prices on these bonds to be in one year? ii) Compute the expected returns (continuously compounded) on the 2 and 3 year bonds over the next year.

c) What are the expected return over the next year on the 1, 3 and 5 year zero coupon bonds if the expectations hypothesis is true?