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.

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Camden Horn

23 April, 23:52

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.

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Rhys Logan · 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%.