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

Maturity(years)YTM

1 10.0%

2 11.0%

3 12.0%

3. If you purchase a two-year zero-coupon bond now, what is the expected total rate of

return over the next year? What if you purchase a three year zero coupon bond? (Hint:

compute the current and expected future prices.)