The term structure for zero-coupon bonds is currently:

Maturity (Years)YTM (%)1year 5.0%. 2 year 6.0%3year 7.0%

Next year at this time, you expect it to be:

Maturity (Years)YTM (%)1year 6.0% 2year 7.0%3year 8.0%

a.What doyouexpect the rate of return to be over the coming year on a 3-year zero-coupon bond?(Round your answer to 1 decimal place.)

b-1.Under the expectations theory, what yields to maturity doesthemarketexpect to observe on 1- and 2-year zeros at the end of the year?(Round your answers to 2 decimal places.)

b-2.Is the market's expectation of the return on the 3-year bond greater or less than yours?

• Greater
• Less