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Suppose the current one-year spot interest rate is 5.9%. One year from now, you believe the economy will start to slow and the one-year spot
Suppose the current one-year spot interest rate is 5.9%. One year from now, you believe the economy will start to slow and the one-year spot rate will fall to 4.9%. In two years, you expect the economy to be in the midst of a recession, causing the Bank of Canada to cut interest rates drastically and the one-year interest rate to fall to 1.9%. The one-year spot interest rate will then rise to 2.9% the following year, and continue to rise by 1% per year until it returns to 5.9%, where it will remain from then on. a. If you were certain regarding these future interest rate changes, what two-year interest rate would be consistent with these expectations? b. What current term structure of interest rates, for terms of one to 10 years, would be consistent with these expectations? c. How does the one-year interest rate compare to the ten-year interest rate? a. If you were certain regarding these future interest rate changes, what two-year spot interest rate would be consistent with these expectations? The two-year spot interest rate consistent with these expectations is \%. (Round to two decimal places.) b. What current term structure of interest rates, for terms of 1 to 10 years, would be consistent with these expectations? Fill in the missing values in the following table: (Round the FV to four decimal places and the EAR to two decimal places.)
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