The current yield curve for default-free zero-coupon bonds is as follows: Maturity (years) YTM 1 9.4 % 2 10.4 3 11.4 a. What are the implied...

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Finance

The current yield curve for default-free zero-coupon bonds is asfollows:
Maturity (years) YTM
1 9.4 %
2 10.4
3 11.4

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.)

Answer & Explanation Solved by verified expert

3.6 Ratings (490 Votes)

Part a One year forward rate 1 year hence F12 1 y22 1 y1 1 1 1042 1 94 1 1141 One year forward rate 2 year hence F23 1 y33 1 y22 1 1 1143 1 1042 1 1343 Part b Under the assumption that the pure expectations hypothesis of the term structure is See Answer

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The current yield curve for default-free zero-coupon bonds is asfollows:Maturity (years)YTM19.4%210.4311.4a. 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.)