Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year
bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two
years from now is expected to be 3% per year. The term premium on a two-year bond is 0.5% per year
and the term premium on a three-year bond is 1.0 % per year. In equilibrium, what is the interest rate
today on a two-year bond? On a three-year bond? What is the shape of the yield curve?
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Transcribed Image Text:1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. The term premium on a two-year bond is 0.5% per year and the term premium on a three-year bond is 1.0 % per year. In equilibrium, what is the interest rate today on a two-year bond? On a three-year bond? What is the shape of the yield curve?
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