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1. Suppose that todays 1 year rate on a Treasury is 2%, and the market expects next years 1 year rate to be 4%.

a. According to the expectations theory of the term structure of interest rates equation: (1+tr2)2 = (1+tr1)(1+t+1r1) what would be todays 2 year rate?

b. Plot todays yield curve, labelling your axis correctly along with the correct numerical values, given the appropriate values from part a. It is helpful to think about what todays yield curve plots in order to do this. Review your notes if needed.

c. What is driving the slope of this yield curve? Explain in at most 2 sentences.