Question: The current yield curve for default-free zero-coupon bonds with face value of $1000 is as follows: (i)one-year zero, yield to maturity 10%, (ii)and two-year zero,

The current yield curve for default-free zero-coupon bonds with face value of $1000 is as follows: (i)one-year zero, yield to maturity 10%, (ii)and two-year zero, yield to maturity 12%

a. What is the implied one-year forward rates?

b. If the liquidity premium hypothesis is correct and there exists a liquidity premium of 1%, what will the one-year spot rate be next year? Assume market expectations are correct.

c. If you purchase a two-year zero-coupon bond now, what is its current price and what is the expected total rate of return over the next year?

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