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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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