Question

4. The following table shows the price of $1000 face value
1-year, 2-year, 3-year, 9-year and 10-year **US Treasury zero
coupon bonds** as of March 2018. Use pure expectations
hypothesis to determine:

a. the interest rate for the 1-year bond.

b. the expected interest rate on a 1-year bond one year from now, in year 2?

b. the expected interest rate on a 1-year bond two years from now, in year 3?

c. the expected interest rate on a 1-year bond nine years from now, in year 10?

1-yr 2-yr 3-yr 9-yr 10-yr

U.S. Treasury (March 2018) 982.51 965.31 948.41 783.17 759.11

What is the bond market telling us about the future path of 1-year interest rates?

Answer #1

Expected interest rate in year t = (price of year t-1 bond - price of year t bond) / (price of year t-1 bond)

We can calculate these as follows:

Year = t | Price of year t bond | Expected interest rate in year t |

0 | 1,000.00 | |

1 | 982.51 | 1.7490% |

2 | 965.31 | 1.7506% |

3 | 948.41 | 1.7507% |

9 | 783.17 | |

10 | 759.11 | 3.0721% |

b. the expected interest rate on a 1-year bond one year from now, in year 2? 1.7506%

b. the expected interest rate on a 1-year bond two years from now, in year 3? 1.7507%

c. the expected interest rate on a 1-year bond nine years from now, in year 10? 3.0721%

d. since the interest rates are going up, bond market is forecasting some economic uncertainty which will make money more expensive

Date
1 yr
2 yr
3 yr
5 yr
7 yr
10 yr
20 yr
30 yr
03/27/19
2.40
2.22
2.16
2.18
2.28
2.39
2.63
2.83
Use the table above and assume that the Pure Expectations Theory
holds, what is the expected 2-year interest rate 3 years from
today?

Assume current 1 year bond rate is 1%, 2 year bond rate is 1.5%
and 3 year bond rate is 2%. Using pure expectation theory,
calculate the expected 1- year rate one year from now? Using pure
expectation theory, calculate expected 1-year rate two years from
now?

The table below shows current and expected future one-year
interest rates. Year One-Year Bond Rate 1= 3% 2= 4% 3.=5% 4.= 8% A.
Assuming that the expectations theory is the correct theory of the
term structure, calculate the current interest rate for a four-year
bond (predicted by that theory). Show your work and include a
one-sentence explanation. B. Assume now that the liquidity premium
theory is the correct theory of the term structure. If the actual
interest rate on a...

Suppose that:
1) The interest rate on a one-year bond today is 3%;
2) The interest rate on a one-year bond starting one year from
now is expected to be 4% per year;
3) The interest rate on a one-year bond starting two years from
now is expected to be 5% per year;
4) The risk premium on a two-year bond is 0.5%; and
5) The risk premium on a three-year bond is 1%.
Use that information to answer the...

9) what should the price be for a $1000 face value bond with a
1% coupon rate, semi-annual coupon payments, and five years to
maturity if the YTM is 12%
a) $568
b)$595
c) $689
d)$1000
10) What is future of $10 invested today, if it is invested for
three years with annual compounding at a 24% interest?
a) 11.9
b) 17.2
c)19.1
d) 20.1

Interest rates on 4-year Treasury securities are currently 6.4%,
while 6-year Treasury securities yield 7.4%. The data has been
collected in the Microsoft Excel Online file below. Open the
spreadsheet and perform the required analysis to answer the
question below.
Expectations Theory
4-yr.
Treasury security yield
6.40%
6-yr.
Treasury security yield
7.40%
Algebraic solution:
Total
return earned on 6-year securities
Total
return earned on 4-year securities
Yield on
2-yr. securities, 4 years from now
Geometric solution:
1 +
Total return...

Date
1 yr
2 yr
3 yr
5 yr
7 yr
10 yr
20 yr
30 yr
03/27/19
2.40
2.22
2.16
2.18
2.28
2.39
2.63
2.83
Use the table above and assume that the Pure Expectations Theory
holds, what is the expected 1-year interest rate next year?

The yield curve is as follows:
2 yr interest rate
3%
3 yr interest rate
4%
5 yr interest
rate 5%
What is the 2 yr forward 3 yr interest
rate?
Under pure expectations theory, what should the three year
interest rate be in two years?
（show the process）

The following table shows $1,000 face value Treasury bonds and
TIPS of different maturity lengths. Assume that all of the bonds
have the same coupon rate:
Bond #
Type
Maturity Length
Yield (%)
1
Treasury Note
10-Year
4.05
2
Treasury Bond
20-Year
5.35
3
TIPS
10-Year
2.05
4
TIPS
20-Year
2.85
Based on the information in the table, we can assume that
traders in the TIPS market expect that the annual average inflation
rate will be _____ percent over the...

Consider two $1000 par treasury bonds that are zero-coupon: (i)
a 1-year bond with a yield to maturity of 2%; (ii) a 2-year bond
with a yield to maturity of 4%.
The yield curve is??:
A) Upward sloping
B) Downward sloping
C) Flat
What is the 1-year forward rate (f1,2) based on the expectations
model? In other words, what is the expected 1-year rate starting in
one year from now and going one year? (to the nearest whole
percent)
A)...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 9 minutes ago

asked 21 minutes ago

asked 25 minutes ago

asked 33 minutes ago

asked 49 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago