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You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 8.0 % 2-year zero-coupon bond 8.1 3-year zero-coupon bond 8.2 4-year zero-coupon bond
You observe the following term structure:
Effective Annual YTM | ||
1-year zero-coupon bond | 8.0 | % |
2-year zero-coupon bond | 8.1 | |
3-year zero-coupon bond | 8.2 | |
4-year zero-coupon bond | 8.3 | |
a. If you believe that the term structure next year will be the same as todays, calculate the return on (i) the 1-year zero and (ii) the 4-year zero. (Do not round intermediate calculations. Round your answers to 1 decimal place.)
b. Which bond provides a greater expected 1-year return?
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