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

d. 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.

e. If you purchase a three-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.