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You observe the following term structure for discount bonds. Maturity Yield 1 year 5.1% 2 years 5.4% 3 years 5.6% 4 years 5.7% 5 years
You observe the following term structure for discount bonds.
Maturity | Yield |
1 year | 5.1% |
2 years | 5.4% |
3 years | 5.6% |
4 years | 5.7% |
5 years | 6% |
Assume that the expectations theory holds. what does the market expect will be the yield on 2-year discount bonds issued three years from today? Explain how to find answer and theory.
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