Using the information provided and the expectations hypothesis, compute the yiel
ID: 2790476 • Letter: U
Question
Using the information provided and the expectations hypothesis, compute the yields for a two-year, three-year, and four-year bonds. rime Expected 1-year Treasury yield 2.5 3.53 oday year from today 2 year from today 3 year from today 9 Now, suppose there is a risk premium attached to each bond. These risk premiums are given in the table below: Time Risk Premium 0% One-year bond Two-year bond Three-year bond Four-year bond 0.5% Using the information above and the liquidity premium theory, compute the yields for a two- year, three-year, and four-year bonds. How does this yield curveExplanation / Answer
Answer:- The yields for a two year,three year and four year bonds
Two Year--- (2.5 +3.5 )/2 =3 % Yield ( Yield from today + Yield 1 year from today)/2
Three Year----(2.5+3.5+4)/3 =3.33% Yield ( Yield from today + Yield 1 year from today +Yield 2 year from today)/3
Four Year-------((2.5+3.5+4+4.5)/4=3.63 % Yield ( Yield from today + Yield 1 year from today +Yield 2 year from today + Yield 3 year from today)/4
Answer 2)
Two Year= 0.5% +(2.5+3.5)/2 = 3.5% yield
Three year=1% +(2.5+3.5+4)/3=4.33% Yield
Four Year =2% +(2.5+3.5+4+4.5)/4= 5.63% Yield
This yield curve starts a bit higher because of the risk premium.It is also steeper because the longer the maturity ,the more of a risk there is associated with the bond.
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