EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 5, Problem 11PROB
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 two year Treasury bond rate is 1.2%, three year Treasury bond rate is 1.4% and four year Treasury bond rate is 1.9%.
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The three-year interest rate is 7.40% and the four-year interest rate is 8.6%. The liquidity premium for three-year and four-year bonds are 0.40 and 0.60 respectively. Calculate the adjusted forward rate forecast for three-year periods in the future
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 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%.
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bond interest rates for the next two years
from time t?
b) How to interpret those expected short-term
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term interest rates?) Discuss as least two
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- the current 1-year, 2-year, and 3-year bond interest rates are 3%, 4%, and 5%, respectively, and the 1-year, 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 afterarrow_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_forwardSuppose 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. Answer:arrow_forward
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- the current 1-year bond and 2-year bond interest rates are both 4% and the 2-year term premium is estimated to be 1%. The expectations theory of the term structure predicts that the expected 1-year bond interest rate next year is ___%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_forwardSuppose 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_forward
- Forecasting 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_forward• Suppose that today's one-year the following one-year interest rates expected to occur over the next four interest rate is 5%. Consider years: 6%, 7%, 8% and 9%. Calculate the interest rate for two-year bonds, based on the expectations theory. What about five-year bonds?arrow_forwardAccording to the expectations theory of the term structure of interest, if the 1-year bond rate today is 6% p.a. and the 2-year bond rate today is 7% p.a., what is the 1-year bond rate next year? A. 6% B. 6.75% C. 7.5% D. 8%arrow_forward
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The U.S. Treasury Markets Explained | Office Hours with Gary Gensler; Author: U.S. Securities and Exchange Commission;https://www.youtube.com/watch?v=uKXZSzY2ZbA;License: Standard Youtube License