Question

draw the yield curve described as follows:

Interest rate: 1% in year 1,1.5% in year2,2% in year3,3.5% in year 4. term premiums:0.5% for one-year bond,rising by 0.25% for each additional year of maturity.

Answer 1

R01 Stands for Return from year 0 to year 1

R12 Stands for Return from year 1 to year 2

R23 Stands for Return from year 2 to year 3

R34 Stands for Return from year 3 to year 4

Given
R01	1%
R12	1.50%
R23	2%
R34	3.50%

Calculating Returns for each year end
R1 = R01	1%
R2 = ((1+RO1)(1+R12)^1/2) - 1	1.25%
R3 = ((1+RO1)(1+R12)(1+R23))^1/3) - 1	1.50%
R3 = ((1+RO1)(1+R12)(1+R23)(1+R34))^1/3) - 1	2.00%

Year (X axis)	Returns	Returns % (as above) (a)	Term Premium (Given) (b)	Total Interest (Y axis = a+b)	Points on Graph (x,y)
1	R1	1.00%	0.50%	1.50%	(1,1.5%)
2	R2	1.25%	0.75%	2.00%	(2,2.0%)
3	R3	1.50%	1.00%	2.50%	(3,2.5%)
4	R4	2.00%	1.25%	3.25%	(4,3.25%)

Yield Curve

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