Suppose the current 1-year and 2-year yields are given as y1,t=3%, and y2,t=4%. Assume that the expectation hypothesis (EH) holds.

a) What is the future expected 1-year yield, E[y1,t+1]?

b) What is the 1-year HPR of a 2-year zero coupon bond (ZCB)?

c) What is the 1-year HPR of a 1-year ZCB?

d) What can be misleading about the EH? Explain in fewer than three lines using your answers in (b) and (c).