Question
Suppose that the path of expected 1-yr interest rates over the next three years is 2%, 4%, 4.5%. If the current two-year interest rate is
Suppose that the path of expected 1-yr interest rates over the next three years is 2%, 4%, 4.5%. If the current two-year interest rate is 4%, what is the implied term premium on the two-year bond? (Hint: You should use the approximation from class.) ---> the answer is not 0.5
Suppose that the spot interest rate on a one-year zero-coupon bond is 2% and the spot interest rate on a two-year zero-coupon bond is 3.5%. Based on the pure expectations theory of the term structure of interest rates, what is the expected one-year interest rate starting in one year? (Hint: You should use the approximation from class.) --> the answer is not 5.02
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