1 Suppose the interest rate on a one-year bond today is 6% per year, the interest rate...
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1 Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. The risk premium on a two-year bond is 0.5% per year and the risk premium on a three-year bond is 1.0% per year. In equilibrium, what is the interest rate today on a two-year bond? On a three-yea r bond? Wha t is the shape of the yield curve?
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