Question

expectation theory

Suppose the annual yield on a 2-year Treasury bond is 4.5%while that on a 1-year bond is 3%. K* is 1% and the maturity riskpremium is zero. Using the expectationtheory forecast the interestrate on a 1-year bond during the second year.(hint: under theexpectaion theory the yield on a 2-year bond is equal to theaverage yieldon 1-year bonds in years 1 and 2)

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