5. Interest Rates: Using the Yield Curve to Estimate Future Interest Rates You can calculate the yield curve, given inflation and maturity-related risks. Looking at the vield 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 theory states that the shape of t 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 vew lono-term bonds as being Hiskier than short-term bonds. For example, assume that you had a 1-year T.bond that vields 1.5\% and a 2-year T-bond that vields 2.1%. From this information you could determine what the yield on a 1-year T-bond one year from now would be. Twestors with a 2 -year horizoy could invest in the 2-year T-bond 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 market is in equilibrium; otherwise, Investors would buy and sell securities until the market was in equilbrium. Quantitative Problem: Today, interest rates on 1-year T-bonds ylold 2.5\%, interest rates on 2-year T-bonds vield 2.1%, and interest rates on 3-year T-bonds yleld 3.2%. 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. Do not round intermediate calculations. flound your answer to four decimal places. b. If the pure expectations theory is correct, what is the vield on 2 -year T-bonds one year fromi now? Be sure to use a ceometric average in your calculations. Do not round intermediate calculations. Round your answer to four deciaal places. c. If the pure expectations theory is correct, what is the yield on 1-year T. bonds two years from nows Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places