ECON.TODAY (COMPLETE)-TEXT ONLY
18th Edition
ISBN: 9780133920161
Author: Miller
Publisher: PEARSON
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Question
Chapter 16, Problem 1P
To determine
(a)
Current
To determine
(b)
Current bond price when interest rate rises to 10%.
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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 ___%:
Please explain the correct answer(s).
An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period, prices are expected to rise by 2 percent. Which statement(s) below is/are true?
1.I. 4 percent is the desired real risk-free interest rate.
2.II. 6 percent is the approximate nominal rate of interest required.
3.III. 2 percent is the expected inflation rate over the period.
A) I only
B) II only
C) III only
D) I and II only
E) I, II, and III
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).
Chapter 16 Solutions
ECON.TODAY (COMPLETE)-TEXT ONLY
Ch. 16.E - Prob. 1PCh. 16.E - Prob. 2PCh. 16.E - Prob. 3PCh. 16.E - Prob. 4PCh. 16 - Prob. 16.1LOCh. 16 - Prob. 16.2LOCh. 16 - Prob. 16.3LOCh. 16 - Prob. 16.4LOCh. 16 - Prob. 16.5LOCh. 16 - Prob. aFCT
Ch. 16 - Prob. bFCTCh. 16 - Prob. 1CTQCh. 16 - Prob. 2CTQCh. 16 - Prob. 1FCTCh. 16 - Prob. 2FCTCh. 16 - Prob. 1PCh. 16 - Prob. 2PCh. 16 - Prob. 3PCh. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Prob. 6PCh. 16 - Prob. 7PCh. 16 - Prob. 8PCh. 16 - Prob. 9PCh. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Prob. 12PCh. 16 - Prob. 13PCh. 16 - Prob. 14PCh. 16 - Prob. 15PCh. 16 - Prob. 16PCh. 16 - Prob. 17P
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- Using your knowledge of the term structure of interest rates, demonstrate that the assertion “the interest rate on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond ” holds.arrow_forward“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?arrow_forwardIn January of 2019 , Sweden announced that it would increase its sale of government bonds from 55 billion krone to 85 billion krone. This resulted in (an increase, decrease, no change, an ambiguous change) in the price of government bonds and (an increase, decrease, no change, an ambiguous change) in the yield of government bonds.arrow_forward
- A bond has a Macaulay duration of 10.00 and is priced to yield 8.0%. If interest rates go up so that the yield goes to 8.5%, what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to 7.5%, what will be the bond's percentage change in price? Comment on your findings. If interest rates go up to 8.5%, the percentage change in the price of the bond is nothing%. (Round to two decimal places.) If interest rates go down to 7.5%, the percentage change in the price of the bond is nothing%. (Round to two decimal places.) Comment on your findings. (Select the best answer below.) A. As interest rates decrease, the price of the bond decreases. As interest rates increase, the price of the bond increases. B. As interest rates increase or decrease, the price of the bond will always increase. C. As interest rates increase or decrease, the price of the bond remains the same. D. As interest rates…arrow_forwardDraw a graph of a typical Real and Nominal Interest Rates (Three-Month TreasuryBills), and discuss why it usually takes that change.arrow_forwardWhat is the difference between real vs. nominal interest rates? What is the ‘term structure’ of interest rates? What is the current level of interest rates, and what does the Fed say will happen to interest rates in the near future?arrow_forward
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