Suppose That: 1)The Interest on a One-Year Bond Today Is

question 103

Short Answer

Suppose that: 1)The interest on a one-year bond today is 3%;
2)The interest on a one-year bond starting one year from now is expected to be 4% per year;
3)The interest on a one-year bond starting two years from now is expected to be 5% per year;
4)The risk premium on a two-year bond is 0.5%; and
5)The risk premium on a three-year bond is 1.0%.
Use that information to answer the following questions.
A)According to the expectations theory,what is the interest rate today on a two-year bond? Show your work.
B)According to the expectations theory,what is the interest rate today on a three-year bond? Show your work.
C)Plot the yield curve

• A)According to the expectations theory,what is the interest rate today on a two-year bond? Show your work.
• B)According to the expectations theory,what is the interest rate today on a three-year bond? Show your work.
• C)Plot the yield curve

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