Question: A recent survey revealed that the market expects the 1-year interest rate to be 5% one year from now, down from it's current level of 6%. If these expectations are correct:

a) What should be the current yield on a 2-year bond: (a) 5.5%; (b) 5%; (c) 6%; (d) 7%;

b) What is the expected capital gain (+) or loss (-) on a $100 dollar face value 2-year bond:

(a) -2.00; (b) -0.50; (c) 6.00; (d) 0.50;

c) What is the holding period yield on the two-year bond assuming it has a face value of $100: (a) 2%; (b) 5%; (c) 6%; (d) 9%  Edit