Using the expectations theory of the term structure

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Suppose the Fed announced that they planned to keep short run interest rates low for a period of two years. This year, the 1 year USTS zero coupon bond interest rate is i = 0.0025 and next year the interest rate on a 1 year zero Coupon bond is expected to be i = 0.005. Using the Expectations Theory of the Term Structure of Interest Ratse, what would the annual interest rate be on a 2 year zero coupon bond? What would the yield curve look like?

Reference no: EM131102689

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