EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 5, Problem 9PROB
(a)
Summary Introduction
Introduction:
Treasury bonds (T-bonds):
These bonds involve earning periodic interest up to maturity (greater than 20 years) and consider government debt securities that are issued by the Federal government of the country.
Expectations theory:
Based on long-term (current) interest rates this theory
To determine: The expected one-year interest rates in the second year by using the expectation theory when the interest rate on one-year treasury bonds is 0.4%, 0.8% on two-year bonds, and 1.1% on three-year T-bonds.
(b)
Summary Introduction
Introduction:
Treasury bonds (T-bonds):
These bonds involve earning periodic interest up to maturity (greater than 20 years) and consider government debt securities that are issued by the Federal government of the country.
Expectations theory:
Based on long-term (current) interest rates this theory forecasts the short-term interest rates for the future where an investor receives the same amount of interest by investing in two (one-year bond and two-year bond), one after the other year. It is useful to calculate the expected returns and differentiate the investment returns in business.
To determine: The expected one-year interest rates in the third year by using the expectation theory when the interest rate on one-year treasury bonds is 1%, 0.9% on two-year bonds, and 0.8% on three-year T-bonds.
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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).
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.
The interest rate on one-year Treasury bonds is 0.8 percent, the rate on two-year T-bonds is 0.9 percent, and the rate on three-year T-bonds is 1.0 percent.
Using the expectations theory, compute the expected one-year interest rate in the second year (Year 2 only). Round your answer to one decimal place.
%
Using the expectations theory, compute the expected one-year interest rate in the third year (Year 3 only). Round your answer to one decimal place.
%
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- 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_forwardSuppose that the current one-year rate and expected one-year T-bill rates over the following three years (i.e., year 2, 3, and 4, respectively) are as follows: 1R1 = 5%, E(2r1)=6%, E(3r1)= 7%, E(4r1)=7.5% Using the unbiased expectations theory, calculate the current rates for three-year and four-year Treasury securities.arrow_forwardThe following information is about the spot rates on Treasury securities and BBB corporate bond: Spot 1 Year Spot 2 Year Spot 3 Year Treasury 3% 4.75% 5.5% BBB Corporate Debt 7.5% 9.15% 10.5% Question: Using the implied forward rates, estimate the annual marginal default probability for the one-year BBB corporate debt in year 3?arrow_forward
- The current 1-year, 2-year, and 3 year bond interest rates are 4%, 5%, and 6%, respectively. The expectations theory of the term structure predicts that the expected 1-year bond interest rate is ___% next year and _____% the year after.arrow_forwardOver the next three years, the expected path of 1-year interest 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 liquidity premium theory of the term structure predicts that the current interest rate on 3-year bond is ___%.arrow_forwardOver the next three years, the expected path of 1-year interest rates 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 liquidity premium theory of the term structure predicts that the current interest rate on 3 year bond is _____%arrow_forward
- The following is a list of prices for zero-coupon bonds with different maturities and par valueof $1,000. Suppose the interest rate is compounded once per year (a) What is, according to the expectations theory, the one-year interest rate in the secondyear? (b) What is, according to the expectations theory, the one-year interest rate in the third year?(c) What is, according to the expectations theory, the one-year interest rate in the forth year?arrow_forwardWhat is the purchase price for a bond that is paying 6 percent annual coupon rate in Semi-annual payments if its Yield to Maturity is 10 % and it has 10 years and 10 months from its purchase date until its maturity? What is the accrued interest rate? Assume the bond is traded in a year of 366 days when calculating the accrued interest.arrow_forwardYou are given the following information regarding the domestic government fixed-interest bond market: the current price of a one-year bond paying coupons at a rate of 4% per annum and redeemed at par is £102.25 per £100 nominal, and the current price of a two-year bond paying coupons at a rate of 6.5% per annum and redeemed at par is £100.37 per £100 nominal. Calculate, to 4 decimal places (in percentages), the two-year spot rate of interest, i2 .arrow_forward
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