The question is:
Suppose 1-yesar Treasury bonds yield 3.0% whild 2 year T-bonds yield 4.5%. Assuming the pure expectations theory is correct and thus the maturity risk premium is zero, what should the yield be on a 1-year T-bond one year from now?
I did: 1*(1.45)^2= 2.1025 Then I took that and divided it by the 1 year rate and subtracted by 1: 2.1025/1.03=2.04-1=1.04. The answer to this question however should be 6.04%. I don't know what I am doing wrong or missing. Any help is appreciated!
Suppose 1-yesar Treasury bonds yield 3.0% whild 2 year T-bonds yield 4.5%. Assuming the pure expectations theory is correct and thus the maturity risk premium is zero, what should the yield be on a 1-year T-bond one year from now?
I did: 1*(1.45)^2= 2.1025 Then I took that and divided it by the 1 year rate and subtracted by 1: 2.1025/1.03=2.04-1=1.04. The answer to this question however should be 6.04%. I don't know what I am doing wrong or missing. Any help is appreciated!