a) Using expectation theory,
(1 + s2)^2 = (1 + s1) x (1 + 1f1)
where, s2 - 2 year rate = 11.50%, s1 - 1 year rate = 10.50%,
=> 1f1 = (1 + 11.50%)^2 / (1 + 10.50%) -1 = 12.51%... 2nd year rate
Similarly,
(1 + s3)^3 = (1 + s2)^2 x (1 + 2f1)
=> 2f1 = (1 + 12.50%)^3 / (1 + 11.50%)^2 - 1 = 14.53%
b) Shift upward as the 2nd year rate is higher than current 1 year rate.
c) Shift upward.
d) Rate next year = s1 = 10.50%
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%)...
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