Determine the bond market to be in equilibrium


Determine the bond market to be in equilibrium according to our whole theory of the term structure of interest rates. The current interest rate on one year bonds is 3%, and you believe, as does everyone in the market, that in one year the interest rate on 1-year bonds will be 3.5%. Suppose that there is no term premium on a one-year bond. Assume the term premium equals 0.75% the number of years to maturity, for the two-year bond. The interest rate today on the two year bond is?

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Macroeconomics: Determine the bond market to be in equilibrium
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