Suppose that the yield curve shows that the one-year bond yield is 7 percent, the two-year yield is 6 percent, and the three-year yield is 6 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent.
a. What are the expected one-year interest rates next year and the following year? The expected one-year interest rate next year = % The expected one-year interest rate the following year = ____%
b. If the risk premiums were all zero, as in the expectetions hypothesis, what would the slope of the yield curve be?