Suppose That All Investors Expect That Interest Rates for the 4

question 42

Multiple Choice

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}& \text { Forward } \\\text { Year } & \text { Interest Rate } \\\hline 0 & \text { (today) } 6 \% \\1 & 7 \% \\2 & 9 \% \\3 & 10 \%\end{array}$ If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

• A) 5%
• B) 7%
• C) 9%
• D) 10%
• E) None of the options are correct.

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