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a. Assuming that the expectations hypothesis is valid, compute the price of the four-year bond shown...

a. Assuming that the expectations hypothesis is valid, compute the price of the four-year bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Beginning of year Price of Bond Expected Price
1 978.43
2 924.97
3 840.12
4 784.39

b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Beginning of year Expected rate of Return
1 %
2 %
3 %
4 %

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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