Assume that the Pure Expectation Theory determines interest rates in the markets. Today's market rates for different maturities follow an interesting pattern. The spot rate for investing for 1 year is 4%. After that, the rate increases by 1% for each year. So, in general, the rate for year Y is simply 4% +1%*(Y-1). Given this information, what is the implied interest rate to invest for 1 year, starting in 3 years?

Assume that the Pure Expectation Theory determines interest rates in the markets. Today's market rates for different maturities follow an interesting pattern. The spot rate for investing for 1 year is 4%. After that, the rate increases by 1% for each year. So, in general, the rate for year Y is simply 4% +1%*(Y-1). Given this information, what is the implied interest rate to invest for 1 year, starting in 3 years?

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 1FPE: What makes for a good investment? Use the approximate yield formula or a financial calculator to...

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What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).
Ross Law is pondering on the following data. Three-year Treasury securities currently yield 6%, while 4 year treasury security yield 6.5%. Assume that the expectations theory holds, what does the market believe the rate will be on a 1-year treasury security, three years from now?
Please include the excel formula Suppose you bought a bond with an annual coupon of 6 percent one year ago for $1,010. The bond sells for $1,025 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?b. What was your total nominal rate of return on this investment over the past year?c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? Input area: Coupon rate 6% Initial price $1,010 Ending price $1,025 Par value $1,000 Inflation rate 3% (Use cells A6 to B10 from the given information to complete this question.) Output area: Coupon paid Dollar return Nominal return Real return
You are required to find how long it will take a sum of money (or anything else) to grow to some specified amount with a certain compound interest rate. Specifically, if a company’s investment has a real rate of return of 4% per year and the inflation rate is 6% per year, approximately how long will it take for the investment to triple?
An investment offers a total return of 12 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 8 percent. What does Janice believe the inflation rate will be over the next year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year after (year 3). According to the expectation theory, what should be the interest rate on 3-year, riskfree securities today?
Suppose the real risk-free rate of interest is r*=4%�*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1×(t−1)%0.1×�−1%, where t� is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%. The average inflation during the first 4 years is2.37% . What is the yield on a 4-year Treasury bond? 4.30% 8.90% 6.75% 7.05% What is the yield on a 4-year BBB-rated bond? 8.90% 7.50% 7.05% 8.45% If the yield on a 5–year Treasury bond is 7.38% and the yield on a 6–year Treasury bond is 7.83%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)
Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1? (Round your answer to 2 decimal places.)
Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1?
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? Q1. A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. a. True b. False Q2. The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 5.9040% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a. 5.8627% b. 6.8973% c. 7.8629% d. 8.7596% Q3. Recall that on a one-year Treasury security the yield is 4.9200% and 5.9040% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2%. What is…