Match each of the following theories with its description. (Enter a value: 1-4.) Expectations theory Theory Preferred habitat Segmented markets ㅁㅁㅁ Description 1. The interest rate for each bond with a different maturity is determined by the supply of and demand for that bond, with no effects from expected returns on other bonds with other maturities. 2. 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. 3. When short-term interest rates are low, yield curves are more likely to have an upward slope; when short-term interest rates are high, yield curves are more likely to slope downward and be inverted. 4. The interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a liquidity premium (also referred to as a term premium) that responds to supply and demand conditions for that bond.

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Under the Pure Expectations Theory, if these investors believe that interest rates will rise in the near future,  a. Two statements are correct. b. they will make up for the lower short-term yield when the short-term securities mature, and they reinvest at a higher rate (if interest rates rise) at maturity. c. All statements are correct. d. the large supply of funds in the short-term market will force annualized yields down, while the reduced supply of long-term funds forces long-term yields up. e. they will invest their funds mostly in the short-term risk-free securities so that they can soon reinvest their funds in securities that offer higher yields after interest rates increase. f. their actions cause funds to flow into the short-term market and away from the long-term market. g. Three statements are correct.

Suppose that the interest rate on a one-year Treasury bill is currently 1%and that investors expect that the interest rates on one-year Treasury bills over thenext three years will be 2%, 3%, and 2%, respectively. Suppose that the expectationshypothesis holds. Calculate the current interest rates on two-year, three-year, andfour-year Treasury notes.

A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as A. a term-structure curve. B. an interest-rate curve. C. a yield curve. D. a risk-structure curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 4%, 4%, 5%, and 8%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is %. (Round your response to the nearest whole number). Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1.) Use the line drawing tool (once) to plot the yield curve generated. 2.) Use the point drawing tool to locate the interest rates on the next four years. Carefully follow the instructions above, and only draw the required objects. Interest Rate 1 2- 6- 2 3 Term to Maturity in Years 5 ♫

Assume that the real risk-free rate is r* = 2% and the average expected inflation rate is 3% for each future year.   The DRP and LP for Bond X are each 1%, and the applicable MRP is 2%.  What is Bond X’s interest rate?   Is Bond X (1) a Treasury bond or a corporate bond and (2) more likely to have a 3-month or a 20-year maturity?  SHOW WORK AND USE FINANCIAL CALCULATOR

The accompanying graph represents the market for loanable funds in the hypothetical country of Bunko. Assume the market is initially in equilibrium and inflation expectations are 2%. a. Adjust the graph to demonstrate the effects of inflation expectations increasing from 2% to 4%. b. What is the real interest rate after the change in inflation expectations? 3% 2% 7% O 5% Interest rate (%) 10 9 8 7 5 3 2 1 0 0 2 Market for Loanable Funds D 4 6 8 10 12 14 16 Quantity of loanable funds (billions of $) 18 S 20

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A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as A. an interest-rate curve. ○ B. a risk-structure curve. OC. a yield curve. ○ D. a term-structure curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 4%, 6%, 6%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is %. (Round your response to the nearest whole number). Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1.) Use the line drawing tool (once) to plot the yield curve generated. 2.) Use the point drawing tool to locate the interest rates on the next four years. Carefully follow the instructions above, and only draw the required objects. Interest Rate Term to Maturity in Years Q

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