[Related to Solved Problem 5.2b] Use the data on Treasury securities in the following table to answer the question: 1 year 2 year Date 03/05/2010 0.36% 0.88% 3 year 1.49% Source: U.S. Department of the Treasury. Assuming that the liquidity premium theory is correct, on March 5, 2010, what did investors expect the interest rate to be on the one-year Treasury bill two years from that date if the term premium on a two-year Treasury note was 0.05% and the term premium on a three-year Treasury note was 0.06%? The expected interest rate is %. (Round your response to two decimal places.)

[Related to Solved Problem 5.2b] Use the data on Treasury securities in the following table to answer the question: 1 year 2 year Date 03/05/2010 0.36% 0.88% 3 year 1.49% Source: U.S. Department of the Treasury. Assuming that the liquidity premium theory is correct, on March 5, 2010, what did investors expect the interest rate to be on the one-year Treasury bill two years from that date if the term premium on a two-year Treasury note was 0.05% and the term premium on a three-year Treasury note was 0.06%? The expected interest rate is %. (Round your response to two decimal places.)

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section: Chapter Questions

Problem 3SQP

See similar textbooks

Similar questions

The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year One-Year Bond Rate Multiyear Bond Rate 1 2.00% 2.00% 2 3.00% 3.00% 3 6.00% 5.00% 4 7.00% 7.00% 5 10.00% 8.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) l Subscript 11 = (enter your response here)% l Subscript 21 = (enter your response here)% l Subscript 31 = (enter your response here)% l Subscript 41 = (enter your response here)% l Subscript 51 = (enter your response here)%
Consider a bond without an expiration date that makes a fixed interest payment of $210 per year. Complete the following table by calculating the interest rate on the bond at different sale prices. (Hint: The effective interest rate on a bond is a ratio of the interest payment to the sale price of the bond times 100.) Price of Bond Interest Rate (Dollars) (Percent) 1,200 1,000 750 600 Use the blue points (circle symbol) and the preceding table to plot the relationship between bond prices and interest rates on the following graph. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. The line showing the relationship between bond prices and interest rates has a _____(POSITIVE/NEGATIVE) slope; in other words, there is _______(INVERSE / A DIRECT) relationship between bond prices and interest rates. NOTE- THIS QUESTION IS DIVIDED INTO SUBPARTS . PLEASE ANSWER…
QUESTION 3 In July 2016, inflation rate in Malaysia was around 2%. The rate is expected to rise further in 2017. i) Using an appropriate diagram, explain what will happen to the equilibrium level of interest rates in response to the above situation based on: the demand-supply of bonds analysis the liquidity preference framework ii) Based on your conclusion on interest rate level in i) above, would you have made a worse or bad investment if you had invested in long-term bonds? Explain.
Suppose the interest rate rises. Using both the supply and demand for bonds and the liquidity preference frameworks, discuss whether this event is likely to reflect good economic news or is a sign of trouble
Consider the following: today's interest rate for a 12-year bond is 7%; today's interest rate for a 4-year bond is 4%; the interest rate for a 4-year bond, expected in 4 years is 5%. Find the interest rate for a 4-year bond expected in 8 years. The interest rate on the 12 year bond carries a .5% liquidity premium. Use the arithmetic or simple average approach.
1. f the current interest rate on a 1-year bond is 2.80% while market participants expect a 1-year interest rate of 1.30% next year, then the expectations theory predicts that the interest rate on a 2-year bond will be ___ %: 2. If the current 1-year interest rate is 3% and the current interest rate on a 2-year bond is 4%, what is the expected 1-year rate starting a year from today? 3. You observe that currently, a 1-year bond has an interest rate of 3.00% while a 2-year bond has an interest rate of 3.00%. This means that, according to the expectations theory (no liquidity premium), market participants expect the 1-year interest rate in one year from now to be ___%:
The reduction in interest rates by the Reserve Bank also stimulated the demand for housing, and some people argue there is now a house price bubble. Using a graph, explain how asset price bubbles occur and why they are inconsistent with the ‘efficient markets hypothesis.’
Concerning the behavior of interest rates, With the help of a graph show and briefly explain what happens to interest rates during times of an economic boom. With the help of a graph, show and briefly explain what happens to interest rates during times of higher expected inflation.
With reference to data, statistics and graphs, would you conclude that over the past 20 years Slovenia experienced instances of ‘liquidity trap’? Explain.
As a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market ________________ ( decreases/ remains the same/ increases) , while the interest rate in the T-bill market ________________ ( decreases/ remains the same/ increases) . Consequently, the default risk premium spread ________________ ( decreases/ remains the same/ increases)
Your bank has the following balance sheet. Assets: Rate-sensitive $200 million Fixed-rate 100 million Liabilities: Rate-sensitive $150 million Fixed-rate 150 million (a) If the interest rates in the economy go down by 3%, will profits increase or decrease? Show your work and calculate the numerical value of the change of profits (b) Briefly explain why profits increase/decrease according to your answer in part (a) (c) Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements? Give the answer of all.
Over the next three years, the expected path of 1-year interest rates is 1,2, and 1 percent, and the 1-year, 2-year and 3-year term premia are 0, 0.2, and 0.5 percent, respectively. Using the information, the liquidity premium theory of the term structure predicts that the current interest rate on 3-year bond is ____% (round to one decimal place x.x).