Answer Happy

You observe the following zero-coupon bonds with a par value of
$1,000:
Required:
(1) Determine the current yield curve (i.e., spot rates
for different maturities)?
(2) Under the Expectations Hypothesis, what would be the
market consensus of the future
yield curve in one year (i.e., one-year and two-year spot rates
in one year)? [4 marks]
(3) Under the Liquidity Preference Theory, there exists a
liquidity premium of 0.5% per annum for maturity longer than one
year, what is your predicted yield curve in one year?
[4 marks]
(4) If you strongly believe that the current yield curve
is unlikely to change in one year and pursue the Riding Yield
Curve strategy, by investing in a three-year zero-coupon bond
for an investment horizon of one year, what would be your holding
period return (HPR)?
Maturity Bond Price Nm 1 2 3 $980.39 $942.60 $889.00