CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
5th Edition
ISBN: 9781305661653
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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The interest rate on five-year Treasury bonds is 3.1 percent, the rate on six-year T-bonds is 2.9 percent, and the rate on seven-yearT-bonds is 2.6 percent. Using the expectations theory, compute the expected one-year interest rates in (a) Year 6 only and (b) Year 7 only.
1) Suppose that today's one-year interest rate is 5%. Consider the following one-year interest rates expected to occur over the next four years: 6%, 7%, 8% and 9%.a. Calculate the interest rate for two-year bonds, based on the expectations theory.b. What about five-year bonds?
Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a two-year bond
is 4%. The term premium on a two-year bond is 1%. According to the expectations hypothesis, what interest
rate should we expect on a one-year bond next year? Answer as a percentage to one decimal place and do
not include symbols (e.g. $, %, commas) in your answer.
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CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
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- The interest rate on one-year Treasury bonds is 0.4 percent, the rate on two-year T-bonds is 0.8 percent, and the rate on three-year T-bonds is 1.1 percent. Using the expectations theory, compute the expected one-year interest rates in (a) the second year (Year 2 only) and (b) the third year (year 3 only).arrow_forwardSuppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.arrow_forwardToday, interest rates on 1-year T-bonds yield 1.2%, interest rates on 2-year T-bonds yield 2%, and interest rates on 3-year T-bonds yield 3.3%. a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.arrow_forward
- Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R₁ = 4.80%, E(2r₁) = 5.45%, E(3r₁) = 5.95%, E(41) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? A. 5.57% B. 5.62% C. 5.83% D. 6.10%arrow_forwardSuppose that the interest rate on one-year bonds is currently 4 percent and is expected to be 5 percent in one year and 6 percent in two years. Using the expectations hypothesis, compute the yields on two- and three-year bonds and plot the yield curve.arrow_forwardToday, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.5%, and interest rates on 3-year T-bonds yield 3.7%.a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.arrow_forward
- Suppose the yield on a two-year-old Treasury bond is 5 percent and the yield on a one-year Treasury bond is a 4 percent. If the maturity risk premium (MRP) on these bonds is zero (0), what is the expected one-year interest rate during the second year (Year 2)?arrow_forwardAccording to the expectations theory of the term structure of interest, if the 1-year bond rate today is 6.50% p.a., the 2-year bond rate today is 6.70% p.a., and the 3-year bond rate today is 7.00%, what will be the 2-year bond rate next year?arrow_forwardToday, interest rates on 1-year T-bonds yield 1.2%, interest rates on 2-year T-bonds yield 2.6%, and interest rates on 3-year T-bonds yield 3.7%.a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations.arrow_forward
- The current 1-year, 2-year, and 3-year bond interest rates are 3%, 4%, and 5%, respectively, and the 1-yaer, 2-year, and 3-year term premia are 0, 0.5, and 1 percent, respectively. The expectations theory of the term structure predicts that the expected 1-year bond interest rate is _______% next year and _______% the year after. Question 9 options: Blank # 1 Blank # 2arrow_forwardForecasting interest rates Assume the current interest rate on a one-year treasury bond(1R1) is 4.50 percent, the current rate on a two-year treasury bond (1R2) is 5.25 percent, and the current rate on a three-year treasury bond (1R3) is 6.50 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year forward rate expected on treasury bills during year 3, 3f1?arrow_forwardThe term structure of interest rates has the following annual effective rates of interest for zero-coupon bonds. Maturity (Year) Annual Effective Yield on Zero-Coupon Bond 1 0.05 0.0525 0.055 3 At time 0, find the one-year forward one-year deferred and one-year forward two-year deferred annual effective forward rates of interest. For an interest only loan, find the level interest payment at the end of each year for three years that has the same present value as the payments based on the forward rates at those times.arrow_forward
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