Question

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 are indifferent to maturity because they don't view long-term bonds as being riskier than short-term bonds. For example, assume that you had a 1-year T-bond that yields 1.7% and a 2-year T-bond that yields 2.4%. From this information you could determine what the yield on a 1-year T-bond one year from now would be. Investors with a 2-year horizon could invest in the 2-year T-bond or they could invest in a 1-year T-bond today and a 1-year T-bond one year from today. Both options should yield the same result if the market is in equilibrium; otherwise, investors would buy and sell securities until the market was in equilibrium. Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.4%, and interest rates on 3-year T-bonds yield 3.6%.

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. Round your answer to four decimal places. Do not round intermediate calculations

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. Round your answer to four decimal places. Do not round intermediate calculations.

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. Round your answer to four decimal places. Do not round intermediate calculations.

Answer #1

How would I put this in a financial calculator?
EXPECTATIONS THEORY
Interest rates on 4-year Treasury securities are currently 6.8%,
while 6-year Treasury securities yield 7.95%. 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.
EXPECTATIONS THEORY
One-year Treasury securities yield 2.3%. The market anticipates
that 1...

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.
%

Which of the term structure theories would support the argument
that the yield curve is determined by investors' expectations of
future interest rates?
Answer Options:
The yield curve theory.
The liquidity preference theory.
The market segmentation theory.
The unbiased expectations theory.
The term structure of interest rates theory.

1. Interest rates on 4-year Treasury securities are currently
5.7%, while 6-year Treasury securities yield 7.3%. 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.

Suppose 2-year
Treasury bonds yield 5.5%, while 1-year bonds yield 6%. r* is 1%,
and the maturity risk premium is zero. Use minus sign for any
negative expected inflation rate.
a. Using the expectations
theory, what is the yield on a 1-year bond 1 year from now?
Calculate the yield using a geometric average. Do not round
intermediate calculations. Round your answer to two decimal
places.
________ %
b. What is the expected
inflation rate in Year 1? Do not...

EXPECTATIONS
THEORY
One-year Treasury
securities yield 3.65%. The market anticipates that 1 year from
now, 1-year Treasury securities will yield 5.55%. If the pure
expectations theory is correct, what is the yield today for 2-year
Treasury securities? Calculate the yield using a geometric average.
Do not round your intermediate calculations. Round your answer to
two decimal places.
___%
EXPECTED
INTEREST RATE
The real risk-free
rate is 2.45%. Inflation is expected to be 3.25% this year, 3.6%
next year, and 2.2%...

We studied several different theories of the yield curve. Which
of the following statements is most likely correct?
a. The liquidity premium version of the expectations theory
cannot explain a flat term structure of interest rates
b. The pure expectations theory suggests that an upward-sloping
term structure of interest rates is a consequence of investors
expecting short-term rates to remain unchanged for a period of
time, followed by investors expecting short-term rates to rise for
a period of time
c....

The yield to maturity on one-year zero-coupon bonds is 7.4%. The
yield to maturity on two-year zero-coupon bonds is 8.4%.
a. What is the forward rate of interest for the
second year? (Do not round intermediate
calculations. Round your answer to 2 decimal
places.)
Forward rate of interest
%
b. If you believe in the expectations
hypothesis, what is your best guess as to the expected value of the
short-term interest rate next year? (Do not round
intermediate calculations. Round...

Can an inverted (i.e., downward sloping) yield curve occur with
the three
theories of the term structure of interest rates? (Pure
expectations theory,
liquidity preference theory, and market segmentation theory.)
a. Yes.
b. All except pure expectations.
c. All except liquidity preference.
d. None of the above

If the pure expectations theory of the term structure is
correct, which of the following statements is CORRECT?
A. An upward sloping yield curve would imply that interest rates
are expected to be lower in the future.
B. If a 1-year Treasury bill has a yield to maturity of 7% and a
2-year Treasury bill has a yield to maturity of 8%, this would
imply the market believes that 1-year rates will be 7.5% one year
from now.
C. The...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 3 hours ago