Question 5
Suppose that the yield to maturity of zero-coupon treasury bond from today up
to year 1, year 2, and year 3 is 2%, 4%, and 6%, respectively. Yield to maturity
is an annualized simple interest rate compounded annually.
(a) What are the annualized zero rates from today up to year 1, year2, and
year 3, i.e., $z_{01}$, $z_{02}$, $z_{03}$, respectively?
(b) If the expectations hypothesis holds, what are the expected future 1-year
spot rate for the next two years, i.e., $E[r_{1,2}]$ and $E[r_{2,3}]$? What is the expected
future annualized spot rate from year 1 to year 3, i.e., $E[r_{1,3}]$?
