Suppose one is examining the term structure of a 3-year bond. Assume that the expectations theory of
Suppose one is examining the term structure of a 3-year bond. Assume that the expectations theory of the term structure of interest rates is correct. iz1 = (i; + i° +1 + i +2)/3 Suppose yesterday, i3t = 0.15 i= 0.05 a) Calculate the average value of i®+1 and i° +2. b) Returning to the fist equation, suppose today the yield to maturity on the 3- year bond has increased by A izt, while the yield to maturity on a one-year bond is unchanged from yesterday. Derive the algebraic expression for the implied change in the expected one-year yield, assuming that the short term expected yield on the one-year bond in period t+2 is unchanged.
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