Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}
\text { Year } & \text { Forward Interest Rate } \
0 & \text { (today) } 3\% \
1 & 4\% \
2 & 5\% \
3 & 6\%
\end{array}$
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) 5%
B) 3%
C) 9%
D) 10%
E) None of the options are correct.

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}
\text { Year } & \text { Forward  Interest Rate } \
0 & \text { (today) } 3\% \
1 & 4\% \
2 & 5\% \
3 & 6\%
\end{array}$
 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) 5%
B) 3%
C) 9%
D) 10%
E) None of the options are correct.

Quizplus · Accepted Answer

The expected rate of return in the first year is based on the current (today's) interest rate, which is 3%.

Suppose That All Investors Expect That Interest Rates for the 4