Over the next three years, the expected path of 1 year interest rates is 1, 2, and 1 percent, and the 1 year, 2 year, and 3 year term premia are 0, 0.2, and 0.5 percent, respectively. Using the information, the liquidity premium theory of the term structure predicts that the current interest rate on 3 year bond is ____%

Over the next three years, the expected path of 1 year interest rates is 1, 2, and 1 percent, and the 1 year, 2 year, and 3 year term premia are 0, 0.2, and 0.5 percent, respectively. Using the information, the liquidity premium theory of the term structure predicts that the current interest rate on 3 year bond is ____%

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter26: Monetary Policy

Section: Chapter Questions

Problem 3SQP

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Over the next three years, the expected path of 1-year interst rates is 4,1, and 1 percent. Today you buy $1 of one-year bond and when it matures you plan to use the money you receive to reinvest in one-year bond again. Then your expected rate of return for this $1 investment is _____% (round to the nearest integer). If the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today is ____%, which implies that the current interest rate on 2-year bond must be ____%
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