Suppose that interest rate on one year bond is 4 percent today and is expected to be 5 percent one year from now, 6 percent two years from now, and 6 percent three years from now. Assume the expectation theory of the term structure, with no term premium and compute the following...
[NOTE: ALL UNDERLYING WORK MUST BE SHOWN]
[1.1] Interest rate on one year bond today
[1.2] Interest rate on two years bond
[1.3] Interest rate on three years bond,
[1.4] Interest rate on four years bond
[1.5] Draw the yield curve for the next four years.
[2.0] Given the slope of the yield curve above, answer the following questions:
[2.1] Is the yield curve for the next four years upward sloping or downward sloping? Explain why
[2.2] What might the yield curve today indicate about future interest rates?
[2.3] What might the yield curve today indicate about economic activity in the next four years?
[2.4] What might the yield curve indicate about inflation in the next four years?
[2.5] What might the yield curve indicate about monetary policy today?
[2.6] Are bonds prices on the long-end of the yield curve falling or rising? Why?
[2.7] What might the yield curve indicate about expected return on long-term bonds?
[2.8] Given the slope of the yield curve today, would you rather be lender or borrower in the next four years? Why?