Problem 15-10 The term structure for zero-coupon bonds is currently: Maturity (Years) YTM (%) 1 4.1 % 2 5.1 3 6.1 Next year at this time, you expect it to be: Maturity (Years) YTM (%) 1 5.1 % 2 6.1 3 7.1 a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? (Round your answer to 1 decimal place.) b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.) b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours? Greater Less rev: 09_14_2018_QC_CS-134332

Explanation:

a.) What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Expect the rate of return to be over the coming year on a 3-year zero-coupon bond = 6.1%

b) Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year?(Round your answers to 2 decimal places. Omit the "%" sign in your response

Yields to maturity does the market expect to observe on 1-year at the end of the year = (1+5.1%)^2/(1+4.1%) - 1  = 6.11%

Yields to maturity does the market expect to observe on 1-year at the end of the year = 6.11%

Yields to maturity does the market expect to observe on 2-year at the end of the year = ((1+6.1%)^3/(1+4.1%))^(1/2) - 1

= 7.11%

Yields to maturity does the market expect to observe on 2-year at the end of the year = 7.11%

2b) Is the market's expectation of the return on the 3-year bond greater or less than yours?

Greater

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