Suppose that the interest rate on one-year bonds is currently 4.5 percent and is expected to...
Suppose that the interest rate on one-year bonds is currently 4.5 percent and is expected to be 5 percent in one year and 2 percent in two years. Using the expectations hypothesis, compute the yield curve for the next three years.
Homework Answers
Yield for one-year bond = 4.5%
Yield for two-year bond = (4.5% + 5%)/2 = 4.75%
Yield for three-year bond = (4.5% + 5% + 2%)/3 = 3.83%
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Suppose that the interest rate on one-year bonds is currently
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