b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.) Maturity 1 2 YTM O Greater O Less % % b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours?
b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.) Maturity 1 2 YTM O Greater O Less % % b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours?
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
Section: Chapter Questions
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Transcribed Image Text:**b-1.** Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? *(Round your answers to 2 decimal places.)*
| **Maturity** | **YTM** |
|--------------|--------------|
| 1 | ________% |
| 2 | ________% |
**b-2.** Is the market's expectation of the return on the 3-year bond greater or less than yours?
- ○ Greater
- ○ Less
### Explanation:
This image shows a question on understanding the market’s expectations under the expectations theory in bond yields to maturity.
**Section b-1** requests the calculation of the yields to maturity for 1-year and 2-year zero-coupon bonds by the end of the year, with the instruction to round the answers to 2 decimal places.
A small table is displayed indicating the maturity periods (1-year and 2-year) alongside a column for their respective Yield to Maturity (YTM) percentages, which need to be filled in.
**Section b-2** asks for a comparative assessment of whether the market's expectation of the return on a 3-year bond is greater or less than the individual's own expectation. Two radio buttons are provided for the selection of “Greater” or “Less.”
![**Understanding Zero-Coupon Bonds and Expected Rate of Return**
Zero-coupon bonds are a type of bond that do not pay periodic interest payments. Instead, they are issued at a discount to their face value and mature at their face value. The yield-to-maturity (YTM) is the interest rate earned if the bond is held until maturity.
### Current Term Structure for Zero-Coupon Bonds
The table below presents the current yield-to-maturity (YTM) for zero-coupon bonds based on their maturity period in years.
| Maturity (Years) | YTM (%) |
|------------------|---------|
| 1 | 5.6% |
| 2 | 6.6% |
| 3 | 7.6% |
### Expected Term Structure Next Year
Based on your expectations, the yield-to-maturity for zero-coupon bonds next year is predicted as follows:
| Maturity (Years) | YTM (%) |
|------------------|---------|
| 1 | 6.6% |
| 2 | 7.6% |
| 3 | 8.6% |
### Analysis Question
**a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond?** *(Round your answer to 1 decimal place.)*
Use the provided tables and your understanding of bond yields to determine the expected rate of return for a zero-coupon bond with a maturity of 3 years over the next year.
**Rate of return:**
[Input Box] %
Consider any relevant financial formulas and calculations to find the rate of return. Remember to round your answer to one decimal place for accuracy.
This exercise helps in understanding how yields and expectations shift over time and their impact on bond investments.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1fd60a6-e122-44a6-b63f-53f11d7f8fb8%2F5bbb1ca5-1143-4712-a54b-aa55a0a2cb13%2Fviro63c_processed.png&w=3840&q=75)
Transcribed Image Text:**Understanding Zero-Coupon Bonds and Expected Rate of Return**
Zero-coupon bonds are a type of bond that do not pay periodic interest payments. Instead, they are issued at a discount to their face value and mature at their face value. The yield-to-maturity (YTM) is the interest rate earned if the bond is held until maturity.
### Current Term Structure for Zero-Coupon Bonds
The table below presents the current yield-to-maturity (YTM) for zero-coupon bonds based on their maturity period in years.
| Maturity (Years) | YTM (%) |
|------------------|---------|
| 1 | 5.6% |
| 2 | 6.6% |
| 3 | 7.6% |
### Expected Term Structure Next Year
Based on your expectations, the yield-to-maturity for zero-coupon bonds next year is predicted as follows:
| Maturity (Years) | YTM (%) |
|------------------|---------|
| 1 | 6.6% |
| 2 | 7.6% |
| 3 | 8.6% |
### Analysis Question
**a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond?** *(Round your answer to 1 decimal place.)*
Use the provided tables and your understanding of bond yields to determine the expected rate of return for a zero-coupon bond with a maturity of 3 years over the next year.
**Rate of return:**
[Input Box] %
Consider any relevant financial formulas and calculations to find the rate of return. Remember to round your answer to one decimal place for accuracy.
This exercise helps in understanding how yields and expectations shift over time and their impact on bond investments.
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