Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r }
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
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)

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r } 
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
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)

Quizplus · Accepted Answer

The expected rate of return for the first year is the forward interest rate for year 0, which is 5%.

Suppose That All Investors Expect That Interest Rates for the 4