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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.)

Beg of year 1,2,3,4

Price of bond $920.90, $912.97, $826.62, $785.62

What is expected price of each?

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.)

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Expert Solution

jeff jeffy answered 1 year ago
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