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

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

b. Assume that the pure expectations hypothesis of the term structure is correct. If market

expectations are accurate, what will the pure yield curve, that is, the yields to maturity on

one- and two-year zero-coupon bonds, be next year?

c. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return

over the next year? What if it were a three-year zero-coupon bond? (Hint: Compute the

current and expected future prices.) Ignore taxes.

d. What should be the current price of a three-year-maturity bond with a 12 percent coupon rate

paid annually? If you purchased it at that price, what would your total expected rate of return

be over the next year (coupon plus price change)? Ignore taxes.