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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

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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 view long-term bonds as being riskier than short-term bonds. For example, assume that you had a 1-year T-bond that yletas 1.6% and a 2- year T-bond that yields 2.1%. From this information you could determine what the yield on a 1-year T-bond one year from now would be, Investor with a 2-year horizon 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 in the market is in equilibrium; otherwise, investors would buy and sell securities until the market was in equilibrium Quantitative Problem: Today, interest rates on 1-year T-bonds yield 16%, interest rates on 2-year T-bonds yield 2.1%, and interest rates on 3-year T-bonds yield 3.3%. a. Ir 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. Round your answer to four decimal places. % Show All Feedback b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places, % Show All Feedback c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round Intermediate calculations. Round your answer to four decimal places Show All Feedback

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