Suppose that all investors expect that interest rates for the 4 years will be as follows: 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

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows:  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

Quizplus · Accepted Answer

The forward interest rate given for the first year of the investment is given as 3% (see table above).

Suppose That All Investors Expect That Interest Rates for the 4