Question: The current yield curve for default-free zero-coupon bonds with a face value of $1,000 is as follows. Write rates as a percentage and round your

The current yield curve for default-free zero-coupon bonds with a face value of $1,000 is as follows. Write rates as a percentage and round your answers at two decimals.

a. (2) What does default-free mean?

b. (5) What are the prices of the bonds and the implied 1-year forward rates?

c. (4) Assume no liquidity premium (=pure expectations hypothesis). Next year, what will be the prices and the yields to maturity on 1- and 2-year zero-coupon bonds?

d. (4) If you purchase a 2-year zero coupon bond today, and would sell after one year, what would be your expected total rate of return? Is this what you would expect? Explain. Hint: calculate the price of the bond next year.

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