Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r }
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
What is the yield to maturity of a 3-year zero coupon bond?

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { c r } 
\text { Year } & \text { Forward Interest Rate } \
\hline 0& \text { (today) } 5 \% \
1 & 7 \% \
2 & 9 \% \
3 & 10 \%
\end{array}$$
What is the yield to maturity of a 3-year zero coupon bond?

Quizplus · Accepted Answer

The yield to maturity of a zero-coupon bond is the internal rate of return (IRR) of the bond's cash flows. In this case, the cash flows are the bond's face value of $1,000, which is received at the end of year 3. The IRR of these cash flows is 6.99%.

Suppose That All Investors Expect That Interest Rates for the 4