You observe the following term structure:
Effective Annual YTM |
|
1 year zero coupon bond |
6.1% |
2 year zero coupon bond |
6.2 |
3 year zero coupon bond |
6.3 |
4 year zero coupon bond |
6.4 |
a. If you believe that the term structure next year will be the same as today’s, will the 1 year or the 4 year zeros provide a greater expected 1 year return?
b. What if you believe in the expectations hypothesis?