Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{ll}
\text { Year } &\text { Forward Interest Rate }\
0 & 4\% \text { (today) } \
1 & 5\% \
2 & 6\%\
3&7\%
\end{array}$ If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)
A) 4%
B) 5%
C) 6%
D) 7%
E) None of the options are correct.

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{ll}
\text { Year } &\text { Forward Interest Rate }\ 
0 & 4\% \text { (today) } \
1 & 5\% \
2 & 6\%\
3&7\%
\end{array}$  If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)
A) 4%
B) 5%
C) 6%
D) 7%
E) None of the options are correct.

Quizplus · Accepted Answer

The expected rate of return in the first year for a zero-coupon bond, assuming the forward rates stay the same, would be equivalent to the current interest rate, which is 4%.

Suppose That All Investors Expect That Interest Rates for the 4