w AutoSave Off ECON 3976 Assign #3 for Students March... Search (Alt+Q) Aman Khosla File Home Insert Draw Design Layout References Mailings Review View Help Comments V Share Xamera on 12 ~ A" A Aa Ap Find Lol Normal No Spacing Paste Heading 1 I Uv ab X2 " A ~ Title Replace Dictate Editor Reuse Select Files Undo Clipboard y Font Paragraph Styles Editing Voice Editor I Reuse Files 1 . I . I . I . 1 . . 1 . 2 . 1 . 3 . 1 . 4 . 1 . 5 . 1 . 6 . 1 . 7 . 1 . 8 . 1 . 9 . 1 . 10 . 1 . 11 . 1 . 12 . 1 . 13 . 1 . 14 . 1 . 15 . 1 . 16 . . 1 . 1 . 4. Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. You observe the following interest rates available today on bonds with differing times to maturity. (You may ignore transactions costs.) Time to maturity Interest Rates to maturity 1 year 5.0% 2 years 7.0% 3 years 7.5% The term premium for the two-year bond is the extra yield (interest) to maturity paid on a two-year bond compared with buying two separate one-year bonds (one today and another after one year). You believe that the term premium on the two-year bond is 0.5 percent. The term premium for the three-year bond is the extra yield (interest) to maturity paid on a three-year bond compared with buying three separate one-year bonds (one today, another after . 10 . 1 . 9 . one year, and another after two years). You believe that the term premium on the three-year bond is 1.0 percent. Given your beliefs about the term premiums on two-year and three-year bonds, calculate (using the formula for the complete theory of term structure of interest rates) the following: . 13 . 1 . 12 . a) the interest rates on one year bonds that you expect one year from now including the term premium, (hint: solve for i, ) and 6 marks b) the interest rates on one year bonds that you expect two years from now including the . 15 . 1 . 14 . term premium (hint: solve for i, ). Show all your work. 7 marks Page 2 of 2 235 of 624 words CX English (United States) % Accessibility: Investigate Focus 100% 2 . C 05:37 U ENG Cloudy IN 23-03-2022 12