The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) YTM (%)...
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The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) YTM (%) 1 4.5 % 2 5.5 3 6.5 a. What are the implied 1-year forward rates? 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? 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? 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. e. What is the expected total rate of return over the next year on a 3-year zero-coupon bond? f. What should be the current price of a 3-year maturity bond with a 6.5% coupon rate paid annually? g. If you purchased the coupon bond at the price you computed in part (f), what would yo
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