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? 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 True False The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% 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? 14.3637% 9.6135% 11.3100% 12.8934% Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% 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 0.2000%. What is the market's estimate of the one-year Treasury rate one year from now? 12.4260% 10.9000% 9,2650% 13.8430% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20% Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? 6.61% 6.45% 6.69% 7.10%

Question
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?
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
True
False
The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% 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?
14.3637%
9.6135%
11.3100%
12.8934%
Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% 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
0.2000%. What is the market's estimate of the one-year Treasury rate one year from now?
12.4260%
10.9000%
9,2650%
13.8430%
Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%
Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate
two years from now?
6.61%
6.45%
6.69%
7.10%

Image Transcription

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? 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 True False The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% 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? 14.3637% 9.6135% 11.3100% 12.8934% Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% 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 0.2000%. What is the market's estimate of the one-year Treasury rate one year from now? 12.4260% 10.9000% 9,2650% 13.8430% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20% Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? 6.61% 6.45% 6.69% 7.10%

Expert Answer

Want to see the step-by-step answer?

See Answer

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Answer
*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Related Finance Q&A

Find answers to questions asked by student like you

Q: Find internal rate of return of a project with an initial cost of $43,000, expected net cash inflows...

A: We can find the internal rate of return for a stream of constant cash flows using RATE function of e...

Q: Goatboy Corporation bonds are currently priced at $1182.56 and have 25 years until maturity. The bon...

A: Following informations are given in the question:

Q: Wildcat engineering decides to take a $10,000 interest only lona. The loan is to be paid montly over...

A: Interest only loan can be described as the loan on which borrower only pays the interest payments du...

Q: Ewald Company’s current stock price is $36, and its last dividend was $2.40. In view of Ewald’s stro...

A: Calculate the growth rate as follows:

Q: Suppose that 10 years ago you bought a home for $150,000, paying 10% as a down payment, and financin...

A: Calculation of Amount of Money Paid to the Loan in 10 years:The amount of money paid to the loan in ...

Q: 5. A dress regularly sells for $141. The sale price is $104. Find the percent decrease of the sale p...

A: Regular price, P = $ 141Current price = S = $ 104Decrease of sale price = P -S = 141 - 104 = $ 37

Q: 2. Your client is 30 years old and wants to retire at age 55. They currently have $100,000 in their ...

A: Hence, the present value of monthly contribution is $44,835.The present value of the contribution ma...

Q: Executives at Microsoft are interested to get into the drone delivery business.They decide to acquir...

A: Option 1: The present value is $40 million.Option 2: Calculate the present value as follows:

Q: camber crporation has to decide if they can finance  purchasing 10 new machines for all their manufa...

A: All financials below are in million.Total capital expenditure = 10 machines x 1.73  / machine = 17.3...