a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond below at the start of (1) the first year; (II) the second year; (III) the third year; (IV) the fourth year. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Beginning Price of Bond of Year Expected Price 1 S 940.90 2 S 923.47 3 S 872.62 4 S 769.66 b. What is the rate of return of the zero bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected Rate of Beginning of Year Return 1 % 2 % 3 % 4 %

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond below at the
start of (1) the first year; (II) the second year; (III) the third year; (IV) the fourth year. (Do not round Intermediate calculations. Round your
answers to 2 decimal places.)
Beginning
Price of Bond
of Year
Expected Price
1
S
940.90
2
S
923.47
3
S
872.62
4
S
769.66
b. What is the rate of return of the zero bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each
year. (Do not round Intermediate calculations. Round your answers to 2 decimal places.)
Expected Rate of
Beginning
of Year
Return
1
%
2
%
3
%
4
%
Transcribed Image Text:a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond below at the start of (1) the first year; (II) the second year; (III) the third year; (IV) the fourth year. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Beginning Price of Bond of Year Expected Price 1 S 940.90 2 S 923.47 3 S 872.62 4 S 769.66 b. What is the rate of return of the zero bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected Rate of Beginning of Year Return 1 % 2 % 3 % 4 %
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