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3 April, 16:37

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.

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  1. 3 April, 18:43
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    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%
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