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

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: year 0- 5%, year 1-7%, year 2- 9% and year 3- 10%. If you have just purchases a 4 year zero coupon bond, what would be the expected rate if return on your investment in the first year if the implied forward rates remain 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: year 0- 5%, year 1-7%, year 2- 9% and year 3- 10%. If you have just purchases a 4 year zero coupon bond, what would be the expected rate if return on your investment in the first year if the implied forward rates remain the same? Par value of the bond= $1,000.

Explanation / Answer

expected rate of return is 5%, as the implied forward rate as in the first year remain the same.

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