4. (a) What assumptions are made in the specification of the rational expectations hypothesis of the term structure of interest rates (REHTS)? [10 marks] (b) Suppose that you have data for the yields to maturity for two zero coupon bonds, one bond has maturity n and the other maturity m, where n>m. Using the two yields, derive an equation which would allow you to test the REHTS, what are the null and alternative hypotheses? [20 marks] (c) Discuss the empirical evidence on the REHTS - what might be the causes of any failures of this hypothesis (if any) that this evidence has uncovered? [20 marks] TOTAL [50 marks] 4. (a) What assumptions are made in the specification of the rational expectations hypothesis of the term structure of interest rates (REHTS)? [10 marks] (b) Suppose that you have data for the yields to maturity for two zero coupon bonds, one bond has maturity n and the other maturity m, where n>m. Using the two yields, derive an equation which would allow you to test the REHTS, what are the null and alternative hypotheses? [20 marks] (c) Discuss the empirical evidence on the REHTS - what might be the causes of any failures of this hypothesis (if any) that this evidence has uncovered? [20 marks] TOTAL [50 marks]