Suppose that the current three-year rate (three-year spot rate) and expected one- year T-bill rates over the following years are as follows: 1 R3 = 12% E(271) = 8% E(371) = 10% I Using the unbiased expectations theory, calculate the current rates for one- and two-year maturity Treasury securities, i.e., 1 R₁ and 1 R2. Convert your answers to percentages. 1R1 = 17.39%; 1R2 = 12.56% 1R1 = 20.73; 1R2 = 11.49% O 1R1 18.26%; 1R2 = 13.01% = O 1R119.52; 1R2 = 14.74%

Suppose that the current three-year rate (three-year spot rate) and expected one- year T-bill rates over the following years are as follows: 1 R3 = 12% E(271) = 8% E(371) = 10% I Using the unbiased expectations theory, calculate the current rates for one- and two-year maturity Treasury securities, i.e., 1 R₁ and 1 R2. Convert your answers to percentages. 1R1 = 17.39%; 1R2 = 12.56% 1R1 = 20.73; 1R2 = 11.49% O 1R1 18.26%; 1R2 = 13.01% = O 1R119.52; 1R2 = 14.74%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4MC: What is the stand-alone risk? Use the scenario data to calculate the standard deviation of the bonds...

See similar textbooks

Similar questions

Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1?
Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1? (Round your answer to 2 decimal places.)
Suppose we observe the three-year Treasury security rate (1R3) to be 4.9 percent, the expected one-year rate next year-E(21)-to be 5.4 percent, and the expected one-year rate the following year-E(301)-to be 6.4 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places. (e.g., 32.16)) One-year Treasury security rate %
Suppose the real risk-free rate is 4.25% and the future rate of inflation is expected to be constant at 3.90%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Include cross-product terms, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)
Suppose the real risk-free rate is 3.80% and the future rate of inflation is expected to be constant at 2.90%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Include cross-product terms, i.e., if averaging is required, use the geometric average.
The real risk-free rate is 2.70%, inflation is expected to be 3.45% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond? Please explain process and show calculations
Suppose we observe the three-year Treasury security rate (183) to be 4.9 percent, the expected one-year rate next year-E(2r1)-to be 5.4 percent, and the expected one-year rate the following year-El3r1)-to be 6.4 percent. If the unblased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
Ross Law is pondering on the following data. Three-year Treasury securities currently yield 6%, while 4 year treasury security yield 6.5%. Assume that the expectations theory holds, what does the market believe the rate will be on a 1-year treasury security, three years from now?
Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 15.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. Year 1 2 O21.20% 3 4 5 6 O22.34% O 23.49% O24.63% O24.10% Market 10.00% 12.00% 16.00% 14.00% 12.00% 10.00% Security J 12.00% 14.00% 18.00% 22.00% 18.00% 14.00%
Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.30%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Include cross-product terms, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.) O a. 3.38% O b. 5.80% O c. 2.50% O d. 2.58% O e. 5.88%
An analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.3% next year, 3.3% the following year, 4.3% the third year, and 5.3% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t – 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Round your intermediate calculations and final answer to two decimal places. % b. What is the yield on a 5-year T-bond? Round your intermediate calculations and final answer to two decimal places. % c. What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal places. %
Suppose we observe the following rates: 1R1 = 0.75%, 1R2 = 1.20%, and E(2r1) = 0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2? (Do not round intermediate calculations. Round your answer to 3 decimal places.)