5. Interest Rates: Using the Vield Curve to Estimate Future interest Rates You can calculate the yield curve, given infation and maturity-reiated nisks. Looking at the yield curve, you can use the information embedded in it to estimate the markef's expectations regarding future inflation, risk, and shert-term interest rates. The theory states that the shape of the yield curve depends on inveators' expectations about future interest rates. The theory assumes that bond traders establish bond prices and interest rates strictly on the basks of expectations for future interest rate and that they ore ind flerem to maturity becbuse they don't view long-term bonds as being riskier than short-term bonds. For example, assume that you had a t-year T-bond that velde 1.54 and a 2.year T.bond that yelds 2.45 . From this information you could determine what the vield on a 1-year T-bond one vear from now would be. fnvestors with a 2. war horizon could imest in the 2-year Thond or they could invest 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 manket is in equinberiumy otherwise, inventors would buy and sell securisies unti the market was in equilibrium. Quantitative Problemi Todey, interet ratet on 1-yeer T-tonds yield 1.5\%, interent fates on 2year T-bonds yield 2.4\%, and interest rates an 3 -year T.bonds yield 3.6%6. .. It the pure eggectations theory is coned, what is the yield on 1-year Th-bonds ene year from new? be sure to was a geometric average in your calculations. Do not round entermediate calculations. Pound your ansiner to four decimal places. b. It the pure expectakeis theory is corred, what is the vitid on 2 -year T.bonds ant year from now? ne sure to use e geomethic average in your caiculationa. Do not round imerricdime calculation. Mound your anewer to four decimal place. c. It the purin expectations theory is carrect, whot is the vield on 1-vear T-bondt two vears from now? be sure to use a geometric average in your calculations, Do not reund