Suppose the current one-year interest rate 5.9%. One year from now, you believe the economy...
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Suppose the current one-year interest rate 5.9%. One year from now, you believe the economy will start to slow and the one-year interest rate will fall to 4.9%. In two years, you expect the economy to be in the midst of a recession, causing the Federal Reserve to cut interest rates drastically and the one-year interest rate to fall to 1.9%. The one-year interest rate will then rise to 2.9% the following year, and continue to rise by 1% per year until it returns to 5.9%, where it will remain from then on. a. If you were certain regarding these future interest rate changes, what two-year interest rate would be consistent with these expectations? b. What current term structure of interest rates, for terms of 1 to 10 years, would be consistent with these expectations? c. How does the one-year interest rate compare to the ten-year interest rate? a. If you were certain regarding these future interest rate changes, what two-year interest rate would be consistent with these expectations? The two-year interest rate consistent with these expectations is %. (Round to two decimal places.)
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