Suppose That All Investors Expect That Interest Rates for the 4

question 22

Multiple Choice

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}\text { Year } & \text { Forward Interest Rate } \\0 & \text { (today) } 3\% \\1 & 4\% \\2 & 5\% \\3 & 6\%\end{array}$
What is the yield to maturity of a 3-year zero-coupon bond?

• A) 7.00%
• B) 9.00%
• C) 6.99%
• D) 4.00%
• E) None of the options are correct.

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Definitions:

Equity Methods

An accounting technique used for recording investments in associate companies where the investor has significant influence but does not have full control or majority ownership, typically implying ownership of 20% to 50% of the voting stock.

Voting Stock

Shares of a corporation that grant the shareholder the right to vote on corporate matters, such as the election of the board of directors.

Equity Method

An accounting technique used to assess the profits earned by investments in other companies by recognizing income and dividends from the investment.

Trading Securities

Financial instruments that are purchased and held primarily for sale in the near term to generate income on short-term price differences.