EBK FINANCIAL MARKETS AND INSTITUTIONS
EBK FINANCIAL MARKETS AND INSTITUTIONS
7th Edition
ISBN: 9781260166101
Author: SAUNDERS
Publisher: YUZU
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Chapter 2, Problem 8P
Summary Introduction

To determine: The current rate of one-year, two-year, three-year and four-year treasury security.

Expert Solution
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Answer to Problem 8P

The current rate of one-year is 6%, two-year is 6.50%, three-year is 6.83% and four-year treasury security is 7.09%.

Explanation of Solution

Determine the current rate of one-year and two-year treasury security

The current rate of one-year treasury security is already given, which is 6%.

CurrentRate2Year=[((1+RateYear1)×(1+ExpectedRateYear2))(1n)1]=[((1+6%)×(1+7%))(12)1]=[1.0649881]=0.064988or6.50%

Therefore, the current rate of two-year treasury security is 6.50%.

Determine the current rate of three-year treasury security

CurrentRate3Year=[((1+RateYear1)×(1+ExpectedRateYear2)×(1+ExpectedRateYear3))(1n)1]=[((1+6%)×(1+7%)×(1+7.50%))(13)1]=[1.0683151]=0.068315or6.83%

Therefore, the current rate of three-year treasury security is 6.83%.

Determine the current rate of four-year treasury security

CurrentRate3Year=[((1+RateYear1)×(1+ExpectedRateYear2)×(1+ExpectedRateYear3)×(1+ExpectedRateYear4))(1n)1]=[((1+6%)×(1+7%)×(1+7.50%)×(1+7.85%))(14)1]=[1.0708521]=0.070852or7.09%

Therefore, the current rate of four-year treasury security is 7.09%.

Summary Introduction

To determine: The yield curve for the current rate.

Expert Solution
Check Mark

Explanation of Solution

The yield curve is as follows:

EBK FINANCIAL MARKETS AND INSTITUTIONS, Chapter 2, Problem 8P

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The U.S. Treasury Markets Explained | Office Hours with Gary Gensler; Author: U.S. Securities and Exchange Commission;https://www.youtube.com/watch?v=uKXZSzY2ZbA;License: Standard Youtube License