Consider the expectations theory

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a. Consider the expectations theory (of the term structure) with a term premium. What is the interest rate on a 5-year bond today if the term premium for a 5-year bond is 2% and 1-year interest rates are expected to remain constant at their current level of 3 percent? No credit if you do not show your work.

b. What is the term premium for a 6-period bond if the interest rate on the 6-period bond today is 10 percent and 1-period interest rates are expected to rise by 2% each year from their current level of 4%? No credit if you do not show your work.

Reference no: EM13873680

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