Prices of zero coupon bonds today (i.e., at t=0) reveal the following pattern of 1-yr forward rates.

(note: t =1 is 1 year from today; t = 2 is two years from today and so on)

Assume annual compounding frequency throughout this question (none of the yields are bond equivalent yields)

Forward rate
6%	>	This is the 1-yr forward rate from t=1 to t=2, call this f1
8%	>	This is the 1-yr forward rate from t=2 to t=3, call this f2

The current yield to maturity for a 1-yr zero is:

In addition to zero-coupon bonds, investors may purchase a 3-yr 9% coupon bond making annual payments of $90, with a par value (face value) of $1,000.

For this question do not use GOAL SEEK or Solver. You must show your work

A Calculate the yield to maturity today for a 2-yr and 3-yr zero (that is y2 and y3)? You must use algebra or an Excel function for this.

B Calculate the price today of the 3-yr, 9% coupon bond? What is its yield to maturity (you must use an Excel function for this)

C Explain the difference between the YTM for the 3-yr coupon bond and the YTM for the 3-yr zero.

Don't just say it is bigger or smaller. You must explain why.

D Under the expectations hypothesis, calculate the expected 1-yr HPR (from t=0 to t=1) for the 3-yr coupon bond.

You must show the calculations, otherwise no credit. HPR is the holding period return.

E Explain why the HPR in part (d) must be equal to one of the yields given in this question.

Explain what yield you are referring to and its value.