1. Suppose that a 1-year zero-coupon bond with face value $1000 currently sells at $943.4, while a 2-year zero sells at $849.9.
2. What is the yield to maturity of the 2-year zero?
3. What is the implied short rate for the second year?
4. Based on the above result, what should be the price of that 2-year zero-coupon bond at the beginning of the second year? If you hold this bond over the entire first year, how much should be your holding period return?
5. What would your HPR change if the actual 1-year interest rate in year 2 is higher than the expected short rate calculated in part (b)?