The term structure for zero-coupon bonds is currently:

Maturity (Years) YTM (%)
1 .............4%
2 .............5
3 .............6
Next year at this time, you expect it to be:

Maturity (Years) YTM (%)
1 .............5%
2 .............6
3 .............7
a. What do you expect the rate of return to be over the coming year on a 3-year zero coupon bond?
b. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? Is the market’s expectation of the return on the 3-year bond greater or less than yours?