Consider the following $1,000 par value zero-coupon bonds.
Bond
Years until maturity
Yield to maturity
A
1
5.0%
B
2
6.0%
C
3
6.5%
D
4
7.0%
According to the expectation hypothesis, what is the market’s expectation of the yield curve one year from now? Specifically, what are the expected values of next year’s yield on bonds with maturities of (i) 1 year; (ii) 2 years; (iii) 3 years?
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