Question

Draw the yield curve described as follows:
• Interest rates: 1% in year 1; 1.5% in year 2; 2% in year 3; 3.5% in year 4.
• Term premiums: 0.5% for a one-year bond, rising by 0.25% for each
additional year of maturity.
What does this yield curve suggest is the predominant short to medium-term
economic outlook among market participants?
Please note, to get full points, you need to illustrate and explain. Precisely, you
need to label the graph, identify the points (and show how you computed all the
points), name the type of the curve and prove your point.

Answer 1