Question

Suppose that the interest rate on a one-year Treasury bill is currently 7% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 8%, 9%, and 7%. Use the expectations theory to calculate the current interest rates on two-year, three-year, and four-year Treasury notes. The current interest rate on two-year Treasury notes is______%.

*(Round your response to two decimal places.)*The
current interest rate on three-year Treasury notes is

______%.

*(Round your response to two decimal places.)*The
current interest rate on four-year Treasury notes is

_______%.

*(Round your response to two decimal places.)*

Enter your answer in each of the answer boxes.

Answer #1

Formula:

Treasury rate for n period = ((1+ Year1 rate) x (1+ Year2 rate) x….. x (1+ nth Year rate))^(1/n) - 1

a.

Current interest for two-year treasury note:

2-Year interest rate = (((1+7%)*(1+8%))^(1/2) – 1

2-Year interest rate = 7.50%

b.

Current interest for three-year treasury note:

3-Year interest rate = (((1+7%) x (1+8%) x (1+9%))^(1/3) - 1

3-Year interest rate = 8.00%

c.

Current interest for three-year treasury note:

4-Year interest rate = (((1+7%) x (1+8%) x (1+9%) x (1+7%))^(1/4) - 1

4-Year interest rate = 7.75%

Question: Suppose that the current one-year rate (one-year spot
rate) and expected one-year T-bill rates over the following 3 years
(i.e., years 2, 3 and 4 respectively) are as follows:
1R1 = 0.4%, E(2r1) = 1.4%, E(3r1) = 8.8% E(4r1) = 9.15%
Using the unbiased expectations theory, calculate the current
(long-term) rates for three-year- and four-year-maturity Treasury
securities. Using the unbiased expectations theory, calculate the
long term rates for one, two, three, and four years maturity
Treasury securities. (Round answers...

Unbiased Expectations Theory One-year Treasury bills currently
earn 5.30 percent. You expect that one year from now, one-year
Treasury bill rates will increase to 5.45 percent. If the unbiased
expectations theory is correct, what should the current rate be on
two-year Treasury securities?

Unbiased Expectations Theory One-year Treasury
bills currently earn 4.50 percent. You expect that one year from
now, one-year Treasury bill rates will increase to 4.65 percent. If
the unbiased expectations theory is correct, what should the
current rate be on two-year Treasury securities?
4.5000%
9.1500%
4.5750%
4.6500%

"One-year Treasury bills currently earn 2.90 percent. You expect
that one year from now, one-year Treasury bill rates will increase
to 3.35 percent. The liquidity premium on two-year securities is
0.085 percent. If the liquidity theory is correct, what should the
current rate be on two-year Treasury securities (Round the
percentage answer to 2 decimal places)?"
3.12%
3.13%
Not possible to compute with the data provided
2.11%
3.17%

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 interest rate expected on Treasury bills during year 3
(E( 3r1) or 3 f1)?
please show how to do in excel

Unbiased Expectations Theory Suppose that the current one-year
rate (one-year spot rate) and expected one-year T-bill rates over
the following three years (i.e., years 2, 3, and 4, respectively)
are as follows: 1R1=4.70%, E(2r1) =5.70%, E(3r1) =6.20%,
E(4r1)=6.55% Using the unbiased expectations theory, what is the
current (long-term) rate for four-year-maturity Treasury
securities?
Multiple Choice
6.5500%
5.7852%
5.7875%

Suppose we observe the three-year Treasury security rate
(1R3) to be 4.3 percent, the
expected one-year rate next
year—E(2r1)—to be 4.8
percent, and the expected one-year rate the following
year—E(3r1)—to be 5.6
percent. If the unbiased expectations theory of the term structure
of interest rates holds, what is the one-year Treasury security
rate? (Do not round intermediate calculations. Round your
answer to 2 decimal places. (e.g., 32.16))
one-year Treasury security rate: _______%

Suppose that the current 1-year rate (1-year spot rate) and
expected 1-year T-bill rates over the following three years (i.e.,
years 2, 3, and 4, respectively) are as follows:
1R1 = 6%,
E(2r1) = 7%,
E(3r1) = 7.60%,
E(4r1) = 7.95%
Using the unbiased expectations theory, calculate the current
(long-term) rates for 1-, 2-, 3-, and 4-year-maturity Treasury
securities. (Round your answers to 2 decimal
places.)

EXPECTATIONS THEORY Interest rates on 4-year Treasury securities
are currently 6.2%, while 6-year Treasury securities yield 7.65%.
If the pure expectations theory is correct, what does the market
believe that 2-year securities will be yielding 4 years from now?
Calculate the yield using a geometric average. Do not round your
intermediate calculations. Round your answer to two decimal places.
%

Problem 6-8
Expectations Theory
Interest rates on 4-year Treasury securities are currently
6.15%, while 6-year Treasury securities yield 7.85%. If the pure
expectations theory is correct, what does the market believe that
2-year securities will be yielding 4 years from now? Round your
answer to two decimal places.

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