The current yield curve for default free zero coupon bonds is as follows:

Maturity (Years) YTM

1 8%

2 9%

3 10%

A.What are the implied one-year forward rates for the years 2 and 3?

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?

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.