If You Have Just Purchased a 4-Year Zero-Coupon Bond, What

question 57

Multiple Choice

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.) Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}& \text { Forward } \\\text { Year } & \text { Interest Rate } \\\hline 0 & \text { (today) } 3 \% \\1 & 4 \% \\2 & 5 \% \\3 & 6 \%\end{array}$

• A) 5%
• B) 3%
• C) 9%
• D) 10%
• E) None of the options are correct.

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Definitions:

Darwin

Charles Darwin, a British naturalist who is best known for his contributions to the science of evolution and the theory of natural selection.

Empirical Approach

A method of inquiry that relies on direct observation, experimentation, and evidence-based understanding to gain knowledge and facts.

Observation

The act of closely monitoring or examining something or someone to gain information or understanding.

Experimentation

The methodical testing of theories or hypotheses by manipulating variables to observe their effects.