Suppose 2-year treasury bonds yield 4.5%, while 1-year bonds yield 3%. r * is 1%, and the maturity risk premium is zero. using the expectations theory, what is the yield on a 1-year bond 1 year from now? calculate the yield using a geometric average.

Question

Kaitlynn Trujillo

Business

29 September, 10:43

Suppose 2-year treasury bonds yield 4.5%, while 1-year bonds yield 3%. r * is 1%, and the maturity risk premium is zero. using the expectations theory, what is the yield on a 1-year bond 1 year from now? calculate the yield using a geometric average.

+3

Answers (1)

Know the Answer?

Alani Kemp · Answer 1

The expectation theory assumes that the yield curve accurately reflects the expected value of interest rates. b. Inflation is 4.5%-3%=1.5%-1%=0.5% in year one. Year two would be 1.5%.