M&B3 3rd Edition by Dean Croushore

تمرين 21

Suppose that the interest rate on a one-year bond is 7 percent today and the interest rates expected on one-year bonds in the future are 6 percent in one year, 5 percent in two years, and 4 percent in three years.
a According to the expectations theory of the term structure, what are the interest rates today on a two-year bond, a three-year bond, and a four-year bond
b If the term premium is equal to 0.5 percent times the number of years to maturity of a bond for times to maturity of two, three, and four years, what are the interest rates today on a two-year bond, a three-year bond, and a four-year bond (Assume no term premium on one-year bonds.)