Consider the following current yield curve Maturity Yield 1 year 8% 2 years 9% 3 years 10% 1. Find the following forward rates: one-year forward rate at t = 1 year, and one year forward rate at t=2 years. You need to compute the forward rate between time 1 and 2, the forward rate between time 2 and 3. (4 points) 2. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the yield to maturity on one-year zero- coupon bond be next year? (2 points) 3. If you purchase a 3-year zero-coupon bond now and hold it for two years, what is the realized compound rate of return after two years? Assume that you could sell the bond after two years at the one year forward rate at time t = 2 years (i.e.. yield to maturity after 2 years is equal to the forward rate between time 2 and 3)? Hint Compute the current value of the bond and the cash flow after two years. (3 points) Consider the following current yield curve Maturity Yield 1 year 8% 2 years 9% 3 years 10% 1. Find the following forward rates: one-year forward rate at t = 1 year, and one year forward rate at t=2 years. You need to compute the forward rate between time 1 and 2, the forward rate between time 2 and 3. (4 points) 2. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the yield to maturity on one-year zero- coupon bond be next year? (2 points) 3. If you purchase a 3-year zero-coupon bond now and hold it for two years, what is the realized compound rate of return after two years? Assume that you could sell the bond after two years at the one year forward rate at time t = 2 years (i.e.. yield to maturity after 2 years is equal to the forward rate between time 2 and 3)? Hint Compute the current value of the bond and the cash flow after two years. (3 points)