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

Maturity (Years)YTM (%)16.0%27.038.0

The face value of the bond is $1000.

a.What are the implied 1-year forward rates?(Do not round intermediate calculations. Round yourfinal answers to 2 decimal places. Omit the "%" signs in your response.)

MaturityForward Rate2 years%3 years%

b.Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the pure yield curve (that is, the yields to maturity on 1- and 2-year zero-coupon bonds) next year?

multiple choice

• Shift downward
• Shift upward

c.If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over the next year? What if you purchase a 3-year zero-coupon bond? (Hint:Compute the current and expected future prices.) Ignore taxes.(Do not round intermediate calculations. Round intermediate "Price" and final answers to 2 decimal places. Omit the "$" & "%" signs in your response.)

Expected Total

Rate of Return2-year bond%3-year bond%

d.What should be the current price of a 3-year maturity bond with a 9% coupon rate paid annually? If you purchased it at that price, what would your total expected rate of return be over the next year (coupon plus price change)? Ignore taxes.(Do not round intermediate calculations. Round "Expected price" and final answers to 2 decimal places. Omit the "$" & "%" signs in your response.)

Expected Total

Rate of ReturnCurrent price$Total expected rate of return%