a- Assuming that the expectations hypothesis is valid, compute the price of the four-year bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year.

Beginning of Year Price of Bond Expected Price

1 $955.90

2 $916.47

3 $834.12

4 $766.39

b- What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year.

Beginning of Year Expected Rate of Return

1

2

3

4