Suppose the YTM on a 1-year zero-coupon bond is 8%. The YTM on a 2-year zero-coupon bond is 10%:

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Suppose the YTM on a 1-year zero-coupon bond is 8%.  The YTM on a 2-year zero-coupon bond is 10%:

According to the expectations hypothesis, what is the expected one year rate in the marketplace for year 2?

Consider a one year investor who expects the YTM on a 1-year bond to equal 6% next year, how should the investor arrange his portfolio today?

If all the investors behave like the investor in (b), what will happen to the equilibrium term structure according to the expectations hypothesis?

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