Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curves for the following paths of one-year interest rates over the next four years: 4%, 6%, 11%, 15%
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Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield
4%, 6%, 11%, 15%
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- Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years: 5%, 6%, 7%, 6% and 5%.“According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvestedover two years, than to invest in a two-year bond if interest rates on one-year bonds are expected to be the samein both years.” Is this statement true, false, or uncertain?Please explain why this statement is (False). The unbiased expectations hypothesis of the term structure posits that long-term interest rates are unrelated to expected future short-term rates.
- With regards to Modern Theories of Interest Rates and Their Application to the Caribbean Region, compare and contrast the assumptions and implications of each yield curve theory in explaining interest rate dynamics in the context of the Caribbean.The unbiased expectation theory and liquidity premium theory are two important theories to explain the shape of yield curve. Discuss and compare the two theoriesAs the economy moves through a business cycle, which of the following term structure of interest rates theories describe the shape of the yield curve? a)Expectations theory, agency theory and segmentation theory. b)Market segmentation theory, agency theory and liquidity premium theory. c)Liquidity preference theory, segmentation theory and agency theory. d)Liquidity premium theory, segmentation theory and expectation hypothesis.
- Over the next three years, the expected path of 1 year interest rats is 4,1, and 1 percent and the 1 year, 2 year and 3 year term premia are 0, 1, and 2 percent, respectively. The expectations theory of the term structure predicts that the current interest rate on 2 year bond is ____% ( round to one decimal place).Based on economics forecast and analysis, one year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows 5.65%, 6.75% 6.85% 7.15% respectively and the liquidity premium from 2nd year to 4th year is 0.05%, 0.10%, 0.12%. Using the liquidity premium theory, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself.Identify two different Theories of Interest Rate determination. List two characteristics of each theory identified above.
- Suppose we observe the following rates: R11=7%, R21=9% R 1 1 = 7 % , R 2 1 = 9 % . If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year interest rate expected one year from now, E(r12) E ( r 1 2 ) ?Under the Pure Expectations Theory, if these investors believe that interest rates will rise in the near future, a. Two statements are correct. b. they will make up for the lower short-term yield when the short-term securities mature, and they reinvest at a higher rate (if interest rates rise) at maturity. c. All statements are correct. d. the large supply of funds in the short-term market will force annualized yields down, while the reduced supply of long-term funds forces long-term yields up. e. they will invest their funds mostly in the short-term risk-free securities so that they can soon reinvest their funds in securities that offer higher yields after interest rates increase. f. their actions cause funds to flow into the short-term market and away from the long-term market. g. Three statements are correct.An inverted yield curve predicts that short-term interest rates a. are expected to rise in the future. b. will rise and then fall in the future. c. will remain unchanged in the future. d. will fall in the future. e. None of the above
