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You can calculate the yield curve, given inflation and maturity-related risks. Looking of the yeld curve, you can ube the information embedded in a to

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You can calculate the yield curve, given inflation and maturity-related risks. Looking of the yeld curve, you can ube the information embedded in a to estimate the market's expectations regarding future inflation, risk, and short-term interest rates. The thesey states that the shape of the vield curve depends on irvestors' expectations about future interest rates. The theory assumes that bond traders establish bood prices and interest rates strictly on the basis ef expectations for future interest rates and that they are indifferent to maturity because they donit view long-term bonds as being riskier than short-term bonds, for example, assume that you had a 1 -year T-bond that yields 1.2% and a 2 -year T-bond that vields 2.4%. from this information you could determine what the vield on a 1 -year T-bond one year from now would be. Investors with a 2 -vear horizon could invest in the 2 -year T-bond or they could invea in a 1-year T-bond today and a 1-year T-bond one year from today. Bech opticns should yeld the same result if the market is in equilbriam; coherwise, investors nould buy and sell secundes until the market was in equilibrium. Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.2%, interest races on 2-year T-bonds yeld 2.4\%, and interest rates on 3 -year T-bonds yield 3.5%. a. If the pure expectations theary is correct, what is the vield on 1 -year T-bands one year from new? Be sure to use a gesrmetric average in your calculations. Do not raund intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, shat is the vield on 2-vear T-boeds one vear from now? Be sure to use a geometric average is your calculations, Do not round intermediate calculabons, Round your answer to four decimal places: C. If the pure expectations theory is correct, what is the yield on 1-year T-honds two years from now? Ba sure to use a geornetric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places

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