If You Have Just Purchased a 4-Year Zero-Coupon Bond, What

Multiple Choice

If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000.) Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}& \text { Forward } \\\text { Year } & \text { Interest Rate } \\\hline 0 & \text { (today) } 3 \% \\1 & 4 \% \\2 & 5 \% \\3 & 6 \%\end{array}$

A) 5%
B) 3%
C) 9%
D) 10%
E) None of the options are correct.