The yield curve for Government-guaranteed zero-coupon bonds is based as follows:
Term to maturity (years) Yield to maturity (% per annum)
1 8%
2 9%
3 10%
REQUIRED:
i. What are the implied one-year forward rates for years 1, 2 and 3 respectively?
ii. If the expectations hypothesis of the term structure of interest rates is correct, in one year’s time, what will be the yield to maturity on a one-year zero-coupon bond?
iii. Based on the same hypothesis as in ii. above, in one year’s time, what will be the yield to maturity on a two-year zero-coupon bond?