You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 6.1% 2-year zero-coupon bond 6.2
Question:
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.
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