Question

Using the following information: Draw the yield curve in this area                               &n

  1. Using the following information:
    1. Draw the yield curve in this area                                                                    (2 pts)
    2. What can you say about investor’s expectations for the future?                  (5 pts)

MATURITY         INTEREST RATE

3 mo.s                         1.5%

6 mo.s                         2.0%

1 yr.                             2.4%

2 yr.s                           2.6%

3 yr.s                           2.7%

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a.)

b)

  • These rates imply investors expectation about the rates for the given maturity. The maturity for which investors are more interested would have lower interest rate due to high demand among investors to invest.
  • It is visible from the above yield curve that interest rate for longer maturity is higher than shorter maturity. Investors have higher preference for shorter duration and they are not willing to invest for longer duration due to risk associated with it. Hence in order to compensate for the same, issuers will offer higher interest rate for longer maturities.
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You can calculate the yield curve, given inflation and maturity-related risks. Looking at the yield curve,...
You can calculate the yield curve, given inflation and maturity-related risks. Looking at the yield curve, you can use the information embedded in it to estimate the market's expectations regarding future inflation, risk, and short-term interest rates. The theory states that the shape of the yield curve depends on investors' expectations about future interest rates. The theory assumes that bond traders establish bond prices and interest rates strictly on the basis of expectations for future interest rates and that they...
Suppose that we observe the following spot rates, i.e. the yield curve is downward sloping. The...
Suppose that we observe the following spot rates, i.e. the yield curve is downward sloping. The spot rates are annual rates that are semi-annually compounded. Time to Maturity Spot Rate 0.5 3.00% 1.0 3.00% 1.5 3.00% 2.0 3.00% 1.  Compute the six-month forward curve, i.e. compute f(0,0.5,1.0), f(0,1.0,1.5), f(0,1.5,2.0). 2.  What can we say about the forward curve? When the term structure of interest rates is flat sloping, the forward curve is _____________ (upward/downward/flat) sloping.
The yield curve is as follows:   2 yr interest rate        3% 3 yr interest rate...
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）
You examine the following yield curve.  Using the Expectations Theory, calculate the estimated yield to maturity of...
You examine the following yield curve.  Using the Expectations Theory, calculate the estimated yield to maturity of a 2 year bond that begins 2 years from today    Maturity YTM 1    3.49%    2      3.64%    3 3.74%       4 3.79% 3.94% 3.87% 8.04% 3.99% 2. The nominal APR on your $30,000, auto loan is 4.800%. If you’re making monthly payments, what is the effective annual rate? 4.602% 5.364% 4.907% 7.552%
Draw the yield curve described as follows: • Interest rates: 1% in year 1; 1.5% in...
Draw the yield curve described as follows: • Interest rates: 1% in year 1; 1.5% in year 2; 2% in year 3; 3.5% in year 4. • Term premiums: 0.5% for a one-year bond, rising by 0.25% for each additional year of maturity. What does this yield curve suggest is the predominant short to medium-term economic outlook among market participants? Please note, to get full points, you need to illustrate and explain. Precisely, you need to label the graph, identify...
An investor has the following information about a zero-coupon bond curve: Years to maturity 1 2...
An investor has the following information about a zero-coupon bond curve: Years to maturity 1 2 3 4 Spot rates 3.23% 3.65% 4.05% 4.30% The investor enters into a 4-year interest rate swap to pay a fixed rate and receive a floating rate based on future 1-year LIBOR rates. If the swap has annual payments, what is the fixed rate you should pay? Six months into the swap the term structure is now: Years to maturity 0.5 1.5 2.5 3.5...
You observe the following yields on Treasury securities of various maturities: Maturity. Yield 3 years6.46 years6.59...
You observe the following yields on Treasury securities of various maturities: Maturity. Yield 3 years6.46 years6.59 years6.812 years7.015 years7.2 1 yr. 6.0% 3 yrs. 6.4% 6 yrs. 6.5% 9 yrs. 6.8% 12 yrs. 7.0% 15 yrs. 7.2% Using the expectations theory, forecast the interest rate on 9-yearTreasuries, six years from now. (That is, what will be the yield on9-year Treasuries, issued in 6 years’ time?) a. 6.50% b. 6.65% c. 6.80% d. 7.67% e. 8.00% Please provide step-by-step explanation and...
Find the following probabilities. Draw a picture of the normal curve and shade the area :...
Find the following probabilities. Draw a picture of the normal curve and shade the area : 1. P (z ≤ 1.31) = 2. P (z ≥ 1.65) = 3. P (−2.17 ≤ z ≤ 2.18) =
The current yield curve for Treasury zero-coupon bonds is as follows: Maturity YTM 1)7% 2 )6%...
The current yield curve for Treasury zero-coupon bonds is as follows: Maturity YTM 1)7% 2 )6% 3) 8% If the market expectations are accurate, what will the two-year zero coupon yield be one year from now? Answer in percentages, with two decimal places.
What does the following yield curve tell us? Treasury yield curve for January 20, 2006. Maturity...
What does the following yield curve tell us? Treasury yield curve for January 20, 2006. Maturity Yield (%) 1 month 3.95 3 months 4.35 6 months 4.48 1 year 4.44 2 years 4.37 3 years 4.32 5 years 4.31 7 years 4.32 10 years 4.37 20 years 4.59
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT