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12. Suppose that 1-year bonds currently offer a nominal yield to maturity of 4%(i1,0=0.04),
otherwise comparable 2-year bonds currently offer a yield to maturity of 4.5%(i2,0=0.045), and 3
year bonds currently offer a yield to maturity of 4.8%(i3,0=0.048). a. Draw the current yield curve.
b. Based on the Expectations Theory of Term Structure, what yield to maturity do investors expect
next year's 1 year bonds to earn (i.e. - what is i1,1e )? c. What do investors expect the yield to be
on 1 year bonds in two years (i1,2e=?) ? d. What do investors expect the yield to be on 2 year
bonds next year (i2,1e=?) ?

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12 Suppose that 1year bonds currently offer a nominal yiel.pdf

  • 1. 12. Suppose that 1-year bonds currently offer a nominal yield to maturity of 4%(i1,0=0.04), otherwise comparable 2-year bonds currently offer a yield to maturity of 4.5%(i2,0=0.045), and 3 year bonds currently offer a yield to maturity of 4.8%(i3,0=0.048). a. Draw the current yield curve. b. Based on the Expectations Theory of Term Structure, what yield to maturity do investors expect next year's 1 year bonds to earn (i.e. - what is i1,1e )? c. What do investors expect the yield to be on 1 year bonds in two years (i1,2e=?) ? d. What do investors expect the yield to be on 2 year bonds next year (i2,1e=?) ?