Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | }
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 5 \% \
\hline 1 & 7 \% \
\hline 2 & 9 \% \
\hline 3 & 10 \% \
\hline
\end{array}$$
-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)7%
C)9%
D)10%
E)none of the above

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | } 
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 5 \% \
\hline 1 & 7 \% \
\hline 2 & 9 \% \
\hline 3 & 10 \% \
\hline
\end{array}$$
-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)7%
C)9%
D)10%
E)none of the above

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