Assume that expectation hypothesis theory holds. Assume that the expected yield for a one-year zero-coupon bond next year is E[y_t+1(1)] = 4% and the yield for a one-year zero-coupon bond today is y_t(1) =2%.

1. Show the HPR of an investor who buys a one-year zero-coupon bond and hold until maturity

2. Show the HPR of an investor who buys a two-year zero-coupon bond, and sell after 1 year.

3. What happens if the expectations of next year’s one-year rate change from 4% to 6%. What is the new y_t(2) (the yield for a two-year zero-coupon bond)?