11. S: Interest Rates: Using the Yield Curve to Estinsate Future Interest Rates Ai You can calculate the yield curve, given inflation and maturity-related risks. Looking at the yield curve, you regarding future inflation, risk, and short-term interest rates rates. The theory assumes that bond traders establish bond can use the Information embedded in itto estimate the market's expectations theory states that the shape of the yield strictly curve depends on investors expectations about future interest on the basis of expectations for future interest rates and that they are indifferent to maturity r example assume that you had a 1-year T bond that y elds l 2%nd a 2 year r bond that yelds 26 now would be. Inivestors with a 2-year hortizon could invest in the 2-year T-bond or they could term bonds as being riskier than p . -year T-bond one year frem From this information you could determine nvest in a 1-year T-bond today and a 1-year T-bond one year from today. Both options should yield the same result if the securities until the market was in equiibrium Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.2%, interest rates on 2-year T. market is in equilibrium, otherwise, Investors would buy and sell bonds yeld 2.6%, and interest rates on 3-year T-bonds yield 3.6%. a. If the pure expectations theory is correct, what is the vield on 1-year T-bonds one year from now? Be sure to use declimal places. Do not round intermediate calculations. correct, what is the yield on J-year T-bonds one year from now? Be sure to use a geometic average in your cakculations. Round your answer to four b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your caiculations Round decimal places. Do not round intermediate calculations c. If the pure expectations theory is correct, what is the yield on i-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Round decimal places. Do not round intermediate calculations your answer to four