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What do bond traders expect the interest rate

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Reference no: EM133029387

Question - Suppose on September 15, 2020, the yields to maturity in the table below were recorded on Treasury discount bonds.

Maturity Date Yield to Maturity (%/year)

September 15, 2021 2.57

September 15, 2022 2.78

September 15, 2023 2.85

September 15, 2024 2.89

(a) If the expectations theory of the term structure holds, what do bond traders expect the interest rate on one-year discount bonds to be on the following dates:

1. September 15, 2021

2. September 15, 2022

3. September 15, 2024

(b) In the question above, if the real interest rate is expected to be 1%/year for the next four years, what do bond traders expect the future inflation rate to be during the following forecasting periods:

1. Sep 16, 2020 - Sep 15, 2021

2. Sep 16, 2021 - Sep 15, 2022

3. Sep 16, 2022 - Sep 15, 2023

4. Sep 16, 2023 - Sep 15, 2024

Reference no: EM133029387

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