Problem:
The current yield for default-free zero coupon bonds is as follows:
Bond 1 - ( 1 year maturity) (10% YTM)
Bond 2 - ( 2 year maturity) (11% YTM)
Bond 3 - ( 3 year maturity) (12% YTM)
Required:
Question 1: What are the implied forward rates?
Question 2: What will the yield curve be next year?
Question 3: If you purchase a two year zero coupon bond now, what is the expected total rate of return over one year?
Note: Provide support for rationale.