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What can be misleading about the eh

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Question: Suppose the current 1-year and 2-year yields are given as y1,t = 3% and y2,t=4%. Assume that the expectation hypothesis (EH) holds.

a) What is the future expected 1-year yield, E[y1,t]?

b) What is the 1-year HPR of a 2-year zero coupon bond (ZCB)?

c) What is the 1-year HPR of a 1-year ZCB?

d) What can be misleading about the EH? Explain using your answers in (b) and (c).

Reference no: EM132756163

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