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

Question

Quizplus · Accepted Answer

The expected rate of return in the first year is the current forward rate, which is 3%.

If You Have Just Purchased a 4-Year Zero-Coupon Bond, What