a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year...
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Finance
a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond below at the start of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Beginning of Year
Price of Bond
Expected Price
1
$ 940.90
2
$ 923.47
3
$ 872.62
4
$ 769.66
b. What is the rate of return of the zero bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Beginning of Year
Expected Rate of Return
1
_____%
2
_____%
3
_____%
4
_____%
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