Using the Yield Curve to Estimate Future Interest Rates You can calculate the yield curve, given infiation and maturity-related risks. Looking at the yield curve, you can use the information embedded in it to estimate the market's expectations regarding future infiation, risk, and short-term interest rates. The theory states that the shape of the yield curve depends an investors' expectations about future interest rates. The theory assumes that bond traders establish bond prices and interest rates strictly on the basis of expectations for future interest rates and that they are indifferent to maturity because they don't vie long-term bonds as being riskier than snort-ter m s or example, assume that you had a year T ond that yields 8% and a 2-year T bond that yelds 2.2% From this inform ation you could de e mine what the ye a 1-year T-bond one year from now would be. Investors with a 2-year horizon cou d invest in the 2-year T-bond or they could invest in a 1-year T-bond today and a 1-year T-bond one year from today. Both options should yield the same resuit if the market is in equilibrium otherwise, investors would buy and sell securitles until the market was in equilbrium Quantitative Problem: Today, interest rates on 1-year T-bonds Yield 1.8%, interest rates on 2-year T-bonds yield 2.2%, and interest rates on 3-year T-bonds yield 3.7%. a f the pure expectations theory is correct, hat is the yield on 1-year T-bonds one year t om now? Be sure to use geomet c average in your calculat ons Round your answer to four decimal places. Do not ound intermediate calculations. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four dedimal places. Do not round intermediate calculations e. f the pure theory is correct, what is the yield on i-year T-bonds two years from now? Be sure to use a geomerric average in your calculaions. Round your answer to four decimal places. Do not round intermediate calculations