What must the term premium be on the 10-year bond

Reference no: EM131139822

a. What is the relationship between the rates of interest on a 10-year bond and on the series of 1-year bonds covering the same period? Assume, for the moment, that all interest rates are known in advance, so there is no uncertainty.

b. Suppose the interest rate on the 10-year bond is 12 percent and that the interest rates on 1-year bonds, for the next 10 years, are expected to remain at 10 percent. What must the term premium be on the 10-year bond?

Reference no: EM131139822

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