The current one-year spot rate is 5%, two-year spot rate is 5.5%, and three-year spot rate is 6%. You invest in a three-year zero-coupon bond today. Suppose that the two-year interest rate one year from now turns out to coincide with what investors expect it today (based on expecta!ons hypothesis). What is your rate of return from inves!ng in this three-year zero-coupon bond for a year? Answer options: None of the above 6% 5.5% 5% 5.67%
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Suppose the interest rate on a 2-year zero coupon bond is 2.0%, that on a 4-year zero coupon bond is 3.0%, and that on a 6-year zero coupon bond is 5.0%. Assuming the pure expectations theory, what does this mean for expected 2-year rates investors can expect to receive in two and four years from today?
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Suppose that a 1-year zero-coupon bond with a face value of $100 currently sells at $88.30, while a 2-year zero sells at $79.36. You are considering the purchase of a 2-year maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 7% per year. a. What is the yield to maturity of the 2-year zero? b. What is the yield to maturity of the 2-year coupon bond? c. What is the forward rate for the second year? d. If the expectations hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding-period return on the coupon bond over the first year? e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?
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