Question $2$

Suppose that the current yield for a $1-$year bond is $2$ percent and it is expected that subsequent $1-$

year rates will rise to $4$ percent, $6$ percent and $10$ percent, respectively. Assume that the pure

expectations theory of the term structure of interest rates is valid.

$($i$)$ Briefly explain the pure expectations theory of the term structure of interest rates

$($ii$)$ Calculate the current yield on a $2-$year long$-$term government bond.

$($iii$)$Calculate the current yield on a $3-$year long$-$term government bond

$($iv$)$Calculate the current yield on a $4-$year long$-$term government bond

$($v$)$ Use the results you obtained in parts $($ii$),($iii$)$ and $($iv$)$ to draw the yield curve and

comment on its shape?