Expectations Theory,

Q2. Set out the formula for the five-year bond rate in terms of the one-year ra e today and one-year rates in the future using the Expectations Theory (ET a. b. Briefly explain whether the Expectations Theory (ET) can capture both ( the tendency of short and long-term rates to move together and (ii) the tender cy of the yield curve to flatten just prior to recessions? 1131 Assume now that risk averse investors require a risk premium over the re urn given by the pure Expectations Theory to hold long-term assets. Today's one year bond rate is 0.5%, the expected one-year rate in year 2 is 1%, in yea 3 it c. 2 is 1.5%, in year 4 t is 2% and in year 5 it is 2.5%. If today's 5-year bond rate is 2.5%, estimate the risk premium that investors require to hold a 5-year bond