At your favorite bond broker, Bonds-R-Us, you see the following prices:
One year 2% coupon $1,000 par bond selling for $1,005. Two year 3% coupon $1,000 par bond selling for $1,025. Three year 4% coupon $1,000 par bond selling for $1,040.
(a) What would be the two year zero coupon rate and the three year zero coupon rate under the unbiased expectations hypothesis?
(b) What can you say about the future interest rates?