Question

Suppose that the interest rate on one-year bonds is currently 4 percent and is expected to be 5 percent in one year and 6 percent in two years. Using the expectations hypothesis, compute the yield curve for the next three years.

Answer 1

the yield curve will be the average between the different percentage of the bonds yield:

Year 1: that is simple the same as the fgiven rate 4%

Year 2: we do the average among the two years:

4% + 5% = 9% in two year average per year 4.5%

Year 3: we procedd the same as before:

4% + 5% + 6% =15% in three years

the average will be of 5%

Step-by-step explanation: