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

Maturity (Years)	YTM (%)
1	5	%
2	6
3	7

a. What are the implied 1-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

2 years	%
3 Years	%

b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next year?

• Shift upward

• Shift downward

c. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 2-year zero-coupon bonds next year?

• Shift downward

• Shift upward

d. If you purchase a 2-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Expected rate of return 2-year bond

%

e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Expected rate of return 3-year bond

%

f. What should be the current price of a 3-year maturity bond with a 7% coupon rate paid annually? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current price

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