1. Consider the following list of prices for zero-coupon bonds of various maturities: 1 4 Maturity (in yrs): 2 3 Bond pr

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1 Consider The Following List Of Prices For Zero Coupon Bonds Of Various Maturities 1 4 Maturity In Yrs 2 3 Bond Pr 1 (28.73 KiB) Viewed 78 times

1. Consider the following list of prices for zero-coupon bonds of various maturities: 1 4 Maturity (in yrs): 2 3 Bond price (in £): 955.00 901.47 838.62 779.89 (a) Calculate the yields to maturity of each bond and the implied sequence of forward rates. Assume that the forward rate is equal to the market's expectation of future short rates (the expectations hypothesis). (b) Compute the expected price path of the 4-year bond in the table above as time passes. (c) What is the expected return on the bond in each year? (d) Show that the expected return equals the forward rate for each year.