3. Question 3 (unbiased expectations theory). Assume the unbiased expecta- tions theory (Chap 2, L-G 2-7) is true throughout this question. (a) The current one-year Treasury bill rate is 5.2 percent and the expected one- year rate 12 months from now is 5.8 percent. What should be the current rate for a two-year Treasury security? (b) Suppose we observe the following rates: R1 = 8%, R: = 10%. What is the one-year interest rate expected one year from now, E(:r)? (c) Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity 5 Treasuries are lower than that of shorter maturity Treasuries). What does this imply about the expectation of the movement of short-term interest rate in the future? Will it go up, go down, or stay roughly unchanged?
3. Question 3 (unbiased expectations theory). Assume the unbiased expecta- tions theory (Chap 2, L-G 2-7) is true throughout this question. (a) The current one-year Treasury bill rate is 5.2 percent and the expected one- year rate 12 months from now is 5.8 percent. What should be the current rate for a two-year Treasury security? (b) Suppose we observe the following rates: R1 = 8%, R: = 10%. What is the one-year interest rate expected one year from now, E(:r)? (c) Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity 5 Treasuries are lower than that of shorter maturity Treasuries). What does this imply about the expectation of the movement of short-term interest rate in the future? Will it go up, go down, or stay roughly unchanged?
Survey of Accounting (Accounting I)
8th Edition
ISBN:9781305961883
Author:Carl Warren
Publisher:Carl Warren
Chapter11: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 11.18E
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