The price of a one-year zero-coupon bond is $943.396, the price of a two-year zero is $873.439, and the price of a three-year zero-coupon bond is $793.832. The bonds (each) have a face value of $1,000. Assume annual compounding.

a) Come the yield to maturity (YTM) on the one-year zero, the two-year zero, and the three-year zero.

b) Compute the implied forward rates for year 2 and for year 3.

c) Assume that the expectations hypothesis is correct. Based on your answers to parts a) and b), can you conclude that interest rates are expected to rise? Explain.

d) If the expectations hypothesis is correct, what will the pure yield curve be next year? [In other words, compute the yields on both a one-year zero and a two-year zero in one year from today.] Use the data from your answers to parts a) and b).

Answer rating: 100% (QA)

a To find the yield to maturity YTM for each zerocoupon bond we can use the following formula YTM Fa... View the full answer