2. Consider the following $1,000 par value zero-coupon bonds: (7) Bond Years to Maturity YTM 3% 4% 5% 6% a. What is the expected 1-year interest rate in the 3rd year'? (2) b. What will be the price of the 2-year zero-coupon bond after 2 years? (2) c. Suppose, next year, you consider buying 3-year zero-coupon bond and holding it for 2 years. What will be the realized compound return? (3) TADT, FALL 2010 Bond Years to Maturity YTM 2 3% 4% 5% 6% 3 D Suppose 1-year short rates are constant at 3%. How much will be the liquidity premium e ach year? Liquidity Premium, fn-Ern) -3 3 2. Consider the following $1,000 par value zero-coupon bonds: (7) Bond Years to Maturity YTM 3% 4% 5% 6% a. What is the expected 1-year interest rate in the 3rd year'? (2) b. What will be the price of the 2-year zero-coupon bond after 2 years? (2) c. Suppose, next year, you consider buying 3-year zero-coupon bond and holding it for 2 years. What will be the realized compound return? (3) TADT, FALL 2010 Bond Years to Maturity YTM 2 3% 4% 5% 6% 3 D Suppose 1-year short rates are constant at 3%. How much will be the liquidity premium e ach year? Liquidity Premium, fn-Ern) -3 3