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What are the equilibrium interest rates today

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Question - Suppose that today's interest rate on 1-year bonds is 4% (i1,0 = 0.04). Interest rates on 1- year bonds next year, in two years, and in three years are expected to be 5%, 6%, and 7%, respectively.

Required -

a. According to the Expectations Theory of Term Structure, what are the equilibrium interest rates today for otherwise comparable 2-year, 3-year, and 4-year bonds?

b. Draw the yield curve for that case.

Reference no: EM133150112

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