Consider the following $1,000 par value zero-coupon bonds:

Bond	Years until Maturity	Yield to Maturity
A	1	8.50	%
B	2	9.50
C	3	10.00
D	4	10.50

a. According to the expectations hypothesis, whatis the market’s expectation of the one-year interest rate threeyears from now? (Do not round intermediatecalculations. Round your answer to 2decimal places.)

b. What are the expected values of next year’syields on bonds with maturities of (a) 1 year; (b) 2 years; (c) 3years? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)

The current yield curve for default-free zero-coupon bonds is asfollows:

Maturity (years)	YTM
1	9.0	%
2	10.0
3	11.0

a. What are the implied one-year forward rates?(Do not round intermediate calculations.Round your answers to 2 decimal places.)

b. Assume that the pure expectations hypothesis ofthe term structure is correct. If market expectations are accurate,what will the pure yield curve (that is, the yields to maturity onone- and two-year zero-coupon bonds) be next year?

• There will be a shift upwards in next year's curve.

• There will be a shift downwards in next year's curve.

• There will be no change in next year's curve.

c. What will be the yield to maturity on two-yearzeros? (Do not round intermediate calculations.Round your answers to 2 decimal places.)

d. If you purchase a two-year zero-coupon bondnow, what is the expected total rate of return over the next year?(Hint: Compute the current and expected future prices.)Ignore taxes. (Do not round intermediate calculations.Round your answer to 2 decimal places.)

e. If you purchase a three-year zero-coupon bondnow, what is the expected total rate of return over the next year?(Hint: Compute the current and expected future prices.)Ignore taxes. (Do not round intermediate calculations.Round your answer to 2 decimal places.)