Hi folks,
Here is the background info:
The question and options are:
Given Eng’s expectation for spot rates, the first-year return on a 3-year zero-coupon bond is closest to:
A. 0.75%.
B. 1.45%.
C. 1.95%.
Why is (A) wrong? The answer key states that (A) is wrong because " 1. Incorrect because this is the 1-year spot rate. This rate would only have been achieved if the spot rates evolved as implied by the current forward curve. This is not the case under Eng’s expectation of an unchanged spot curve."
Can someone help me understand the significance of an unchanged spot curve in this question?
Thanks!