1.Question 1

a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations. %

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 calculations. Round your answer to four decimal places. Do not round intermediate calculations. %

c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations.

2.Question 2

a. What is the yield on a 1-year T-bill? Round your intermediate calculations and final answer to two decimal places. %

b. What is the yield on a 5-year T-bond? Round your intermediate calculations and final answer to two decimal places. %

c. What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal places.

Using the Yield Curve to Estimate Future Interest Rates You can calculate the yield curve, given inflation and maturity-related risks. Looking at the yield curve, you can use the information embedded in it to estimate the market's expectations regarding future inflation, risk, and short-term interest rates. The Select theory states that the shape of the yield curve depends on investors' expectations about future interest rates. The theory assumes that bond traders establish bond prices and interest rates strictly on the basis of expectations for future interest rates and that they are indifferent to maturity because they don't view long-term bonds as being riskier than short-term bonds. For example, assume that you had a 1 year Tbond that yields 1.4% and a 2-year Tbond that yields 2.3%. From this information you could determine what the yield on a 1-year Tbond one year from now would be. Investors with a 2 year horizon could invest in the 2-year Tbond or they could invest in a 1-year Tbond today and a 1-year Tbond one year from today. Both options should yield the same result if the market is in equilibrium; otherwise investors would buy and sell securities until the market was in equilibrium Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.4%, interest rates on 2-year Tbonds yield 2.3%, and interest rates on 3-year Tbonds yield 3.4% a. If the pure expectations theory is correct, what is the yield on 1-year Tbonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations. 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 calculations. Round your answer to four decimal places. Do not round intermediate calculations. c. If the pure expectations theory is correct, what is the yield on 1-year Tbonds two years from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations