1.A two-year bond with par value $1,000 making annual coupon payments of $102 is priced at $1,000.

a.What is the yield to maturity of the bond?

b.What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 8.2%, (b) 10.2%, (c) 12.2%?(Do not round intermediate calculations.Round your answers to 2 decimal places.)

2.The current yield curve for default-free zero-coupon bonds is as follows:

Maturity (years) YTM

1 10.4%

2 11.4

3 12.4

a.What are the implied one-year forward rates?

Maturity (years) YTM

1 10.4%

2 11.4%%---------?

3 12.4%%---------?

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

c.If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes.