Question

11. The yield-to-maturities on Treasury issues do not give a direct reading of future spot rates as:

(a) not enough years of maturities are available.

(b) there is no default risk measured.

(c) most have coupon rates.

(d) the treasury market is not large enough to draw conclusion

(e) most of the securities are callable.

12. Under unbiased expectations theory, the expected future spot rate

(a) is the mean of future spot rates.

(b) is equal to the forward rate.

(c) equal to the level of future inflation.

(d) less than the forward rate.

(e) more than the forward rate.

Answer 1

11) Option (c) is the correct answer.

Because treasury do have coupon rates which varies periodically due to interest rate fluctuations. So future spot rate cannot be calculated directly.

12) Option (b) is the correct answer.

Because under unbiaed expectations theory, the expected future spot rate will be equal to the forward rate calculated at the present. As the long term interest rates will be equal to the short term term interest rates according to theory, forward rate is equal to spot future rate.