Let M be the month of your birthday.

Define D $=$ M if M $>5$; and D $=$ M $+5$ if M $<=5.$

Assume the yield curve for default$-$free zero coupon bonds is currently as follows:

Maturity $($Years$)$ YTM

$1$ D$+1\%$

$2$ D$+2\%$

$3$ D$+3\%$

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 you purchase a three$-$year zero coupon

bond? Ignore taxes.