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Yield to maturity on a two-year zero-coupon bond

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Reference no: EM132502696

Suppose the yield to maturity on a one-year zero-coupon bond is 8%.

The yield to maturity on a two-year zero-coupon bond is 10%. Answer the following questions (use annual compounding): 

(a) According to the Expectations Hypothesis, what is the expected one-year rate in the marketplace for year 2?

(b) Consider a one-year investor who expects the yield to maturity on a one-year bond to equal 6% next year. How should this investor arrange his or her portfolio today?

(c) If all investors behave like the investor in (b), what will happen to the equilibrium term structure according to the Expectations Hypothesis?

Reference no: EM132502696

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