How do maturity risk premiums affect the yield curve?
If the inflation rate is expected to increase, would this increase or
decrease the slope of the What key assumption underlies the pure expectations theory?
Assuming that the pure expectations theory is correct, how are
expected short-term rates used to calculate expected long-term
rates??
If the inflation rate is expected to remain constant at the current level
in the future, would the yield curve slope up, down, or be horizon-
tal? Consider all factors that affect the yield curve, not just inflation.
What key assumption underlies the pure expectations theory?
Assuming that the pure expectations theory is correct, how are
expected short-term rates used to calculate expected long-term
rates?
According to the pure expectations theory, what would happen if
long-term rates were not an average of expected short-term rates?
Most evidence suggests that a positive maturity risk premium exists.
How would this affect your calculations when determining interest
rates?
Assume the interest rate on a one-year T-bond is currently 7 percent
and the rate on a two-year bond is 9 percent. If the maturity risk
premium is zero, what is a reasonable forecast of the rate on a one-
year bond next year? What would the forecast be if the maturity risk
premium on the two-year bond were 0.5 percent and it was zero for
the one-year bond?
