You observe the following term structure:

Effective Annual YTM 1-year zero-coupon bond 6.1%

2-year zero-coupon bond 6.2 3-year zero-coupon bond 6.3 4-year zero-coupon bond 6.4

a. If you believe that the term structure next year will be the same as today’s, calculate the return on (i) the 1-year zero and (ii) the 4-year zero.

b. Which bond provides a greater expected 1-year return?

c. Redo your answers to parts

(a) and

(b) if you believe in the expectations hypothesis. P-639