The current yield curve for default-free zero-coupon bonds is as follows:

Maturity (years) YTM
1 9.8 %
2 10.8
3 11.8

a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Maturity (years) YTM Forward Rate
1 9.8 %
2 10.8 % %
3 11.8 % %

b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?

There will be a shift upwards in next year's curve.
There will be a shift downwards in next year's curve.
There will be no change in next year's curve.

c-1. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected total rate of return %
c-2. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

in the next year a two year zero coupon bond will be a year zero and sell at 1000/1.1181 = 894.37 to get the return we take divide selling prices at year zero the trading price according to ytm is 1000/1.108² =814.55

therefore expected return 894.37/814.55= 9.79%

c2 the zero coupon bond at three year zero is trading at 1000/1.1282 = 886.446 and according to the ytm the coupon is trading at 1000/13.83^3= 715.607

therefore the expected return is

785.711/715.607=9.79%