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Suppose that the yield curve shows that the one-year bond yield is 2 percent, the two-year yield is 3 percent, and the three-year yield is 4 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent.
a. What are the expected one-year interest rates next year and the following year?
The expected one-year interest rate next year = %
The expected one-year interest rate the following year = %
b. If the risk premiums were all zero, as in the Expectations Hypothesis, what would the slope of the yield curve be?
The slope of the yield curve would be?
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