The current yield curve for default-free zero-coupon bonds is as follows: Maturity (years) YTM 1year= 10% 2 years= 11% 3 years =12%

a) What are the implied one-year forward rates in one year and in two years?

b) Assume that the expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?

c) Assume again that the expectations hypothesis of the term structure is correct. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year?

d) Assume again that the expectations hypothesis of the term structure is correct. If you are a risk-averse investor with an horizon of one year, would you prefer to invest in the two-year bond and sell it after one year as described in point c) or would you prefer to invest in the one-year bond?