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Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $94.34, while a 2-year zero sells at $84.99. 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 12% per year.

a. What is the yield to maturity of the 2-year zero? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

	Yield to Maturity
2-year Zero	%

b. What is the yield to maturity of the 2-year coupon bond? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

	Yield to Maturity
2-year coupon bond	%

c. What is the forward rate for the second year? (Do not round intermediate calculations. Round you final answer to 2 decimal places.)

Forward rate

%

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? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expected price
Holding-period return	%

e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?

• Higher

• Lower

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