The yield curve for Treasury bonds shows that yield for one year bonds(T-bills) is 2% and the yield for 2,3,4 and 5 year bonds(T-notes) is 3%,4%,4.5% and 4.5% percent respectively.
(a) Calculate the expected one year and two year interest rates one year from now using expectation theory
(b) Calculate a one year expected rate two years from now using expectation theory
(c) If the term premiums are 0,0.25,0.5,0.75 and 1% for 1-5 years, what’s the expected two year rate one year from now.