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(a) The YTM on a three year bond is 5%. What is the average expected short rate over the life of the bond assuming the

(a) The YTM on a three year bond is 5%. What is the average expected short rate over the life of the bond assuming the expectations hypothesis holds? [5 marks]

(b) Suppose that the YTM of a three year bond is expected to increase by 2% over the year. Assuming the expectations hypothesis holds, what is the current spread on the bond (the gap between the bond YTM and the current short rate)? [5 marks]


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