Assume that the expectations theory fully explains the Treasury Bond Yield Curve. The 10-year zero-coupon bond maturing in 2030 has a yield-to-maturity (YTM) of 3.5%. Assume that instead of simply buying the 10 year, you decide you will: buy a 5-year bond today, then, when that bond matures in 2025, then, you will buy a new 5-year bond that starts in 2025 and will mature in 2030.

Scenario A Upward sloping yield curve. a) if todays 5 year bond has a YTM of 1%, what would the second bond need for YTM for you to get a terminal value that would match simply buying the 10 year bond today?

Scenario B Downward sloping yield curve b) if todays 5 year bond has a YTM of 5%, what would the second bond need for YTM for you to get a terminal value that would match simply buying the 10 year bond today?

Bond investors love bad news and dropping interest rates are usually a sign of economic weakness or even recessions. c) Which scenario indicates the bond market foresees a bad economy (A or B)?