CFA Practice Question

CFA Practice Question

The prices of a two year and a three year Zeros (maturity values of $1) is $0.897 and $0.844. According to the Pure (Unbiased) Expectations Theory, the market's expectation of the one year yield two years from now is:
A. 6.18%
B. 6.28%
C. 6.38%
Explanation: Market expectation for one year yield two years from now = Return from year 2 to year 3 at current prices = (Price at year 2 / Price at year 3) - 1 = (0.897 / 0.844) - 1 = 6.28%

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