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The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) YTM (%) 1 5 % 2 6 3 7 a. What are

The current yield curve for default-free zero-coupon bonds is as follows:

Maturity (Years) YTM (%)
1 5 %
2 6
3 7

a. What are the implied 1-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

2 years %
3 Years %

b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next year?

  • Shift upward

  • Shift downward

c. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 2-year zero-coupon bonds next year?

  • Shift downward

  • Shift upward

d. If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Expected rate of return 2-year bond %

e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Expected rate of return 3-year bond %

f. What should be the current price of a 3-year maturity bond with a 7% coupon rate paid annually? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current price

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