EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 5, Problem 10PROB
Summary Introduction
Expectation theory:
Expectation theory is used to find forward interest rate based on the prevailing long term interest rates.
Calculate the forward rate as follows:
Given five year Treasury bond rate is 3.1%, six year Treasury bond rate is 2.9% and seven year Treasury bond rate is 2.6%.
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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.
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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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