1. Suppose today is january 2,2017, and investors expect the annual inflation rates in 2017 through 2019 to be
2017 - 2.1%
2018 - 1.5%
2019 - 0.9%
To yield a risk free rare, R*, equal to 2 percnt, what would the average nominal rate be on (a) one-year bond (b)two-year bond (c) three year bond? Assume the bonds are risk free
2. Suppose today is January 2,2017, and investors expect the annual risk-free interest rates in 2021 and 2022 to be:
2021 - 4.5%
2022 - 2.3%
Currently a four year treasury bond that matures on December 31,2020 has an interest rate equal to 2.5 percent. What is the yield to maturity for treasury bonds that mature at the end of (a) 2021 (a five-year bond) and (b)2022 (a six-year bond) Assume the bonds have no risk.