Question

If 1-year interest rates for the next three years, starting with this year, are expected to be 1, 1, and 1 percent, and the 2-year and the 3-year term premiums are 0. 5 and 1 percent, respectively, than the 3-year bond rate will be.

Answer 1

It can be deduced that the current interest rate on the 3 year bond is 1.5%

How to calculate the interest rate

It can be deduced that the interest rates for the next three years have been given.

Also, according to the given expected path, the interest rate on the premium is given.

Therefore, the current interest rate on the 3 year bond will be:

= 1 + 0.5

= 1.5%

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