Question: Using the Yield Curve to Estimate Future Interest Rates

Today, interest rates on 1-year T-bonds yield 1.4%, interest rates on 2-year T-bonds yield 2.4%, and interest rates on 3-year T-bonds yield 3.2%.

a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations.

b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations.

c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations.