Question

(b) (i) Short term (one year) interest rates over the next 6
years will be 0.5%, 0.6%, 0.7%,

0.76%, 0.80% and 0.84%. Using the expectation theory, what will be
the interest rates

on a three-year bond? [2 marks]

(ii) Predict the one-year interest rate three years from today
if interest rates are 4%,

4.5%, 4.75% and 5% for bonds with one to four years to maturity and
respectively

liquidity premiums are 0%, 0.1% , 0.15% and 0.2%. [3 marks]

(c) Explain THREE (3) conventional monetary policy tools used by
the Central bank

of a country to control the money supply and interest rates in the
financial markets.

Answer #1

b)

i) Three year rate (r) is given by

(1+r)^3= 1.005*1.006*1.007

=> r= 0.006 or **0.6%**

ii) Forward rate for 1 year after 3 years

= (1+4 year bond interest rate)^4/(1+3 year bond interest rate)^3- 1

=1.05^4/1.0475^3-1

=0.0575359

or **5.7536%**

iii) Monetary policy tools:

a) Open market operations : The Central bank can buy or sell Treasury bills/bonds in the open market to increase or decrease money supply

b) Reserve Requirements : The Central bank can change the reserve requirements and increase or decrease the money supply through banks

c) Changing the key rates : Central bank can change the key interest rates . Increasing the interest rates puts the money in banks and decreasing the interest rates increases the money supply

Analysts predict that short-term interest rates over the next 4
years will be as follows: 5.5%, 4%, 1.1%, and 10%, respectively.
According to expectations theory, the yield on a discount bond with
a three year maturity will be ____ and yield on bond with a four
year maturity will be ____.
Group of answer choices
3.05%; 5.55%
3.05%; 5.15%
3.53%; 5.55%
3.53%; 5.15%
Consider the same short-term interest rates as in problem 4
above. If the yield on a discount...

According to the liquidity premium theory of the term structure
of interest rates, if the one-year bond rate is expected to be
3%, 6%, and 9% over each of the next three years, and if the
liquidity premium on a three-year bond is 3%, then the interest
rate on a three-year bond is _?

If the expected path of 1-year interest rates over the
next five years is 1%, 2%, 3%, 4%, and 5%, the expectations theory
predicts which maturity of bond with the highest interest rate
today? Assume that liquidity premium for the bonds of 1 to 5 years
to maturity is 0%, 0.1%, 0.13% 0.2%, and 0.3% respectively,
calculate YTM of 1 to 5 year bonds.

If the expected path of one-year interest rates over the next
four years is 5 percent, 4 percent, 3 percent, and 2 percent. Draw
the yield curve under the expectations theory. Now, assume
liquidity premium are 0.25 for 2 year, 0.5 for 3 year and 0.75 for
4 year bonds, draw on the same graph (ideally in different color)
the yield curve under the liquidity premium theory.

Based on economists’ forecasts and analysis, one-year T-bill
rates and liquidity premiums for the next four years are expected
to be as follows:
1R1
=
.33%
E(2r1)
=
.70%
L2
=
0.06%
E(3r1)
=
.80%
L3
=
0.15%
E(4r1)
=
1.10%
L4
=
0.16%
Identify the four annual rates. (Round your answers to 2
decimal places. (e.g., 32.16))
Annual Rates
Year
1
%
Year
2
%
Year
3
%
Year
4
%

Show working please
Consider the same short-term interest rates as in problem 4
above. If the yield on a discount bond that matures in 4 years is
8.25%, then according to liquidity premium theory, the premium
attached to the 4 year discount bond is?
Ref. question
Analysts predict that short-term interest rates over the next 4
years will be as follows: 13%, 2%, 7%, and 10%, respectively.
According to expectations theory, the yield on a discount bond with
a three...

. Suppose that the one-year interest rate over the
next four years is expected to be 2%, 3%, 4% and 6%.
a) Find the interest rate on a three- year bond.
b) Find the interest rate on a four-year bond
c) Find the interest rate on a four -year bond when the
liquidity premium of the investor to
hold a four-year bond is 2%.

The one year interest rates in the future 5 years starting from
2020 are respectively, 1%, 2%, 3%, 4% and 5%. Estimate the interest
rates of the following bonds issued in 2020 using the expectations
theory.
a. Two year bond
b. Three year bond
c. Four year bond
d. Five year bond
2. Draw a yield curve using above data.
3. What will happen to the yield curve if you incorporate
liquidity premium theory to make estimates of future interest...

A.)
Consider the following spot interest rates for maturities of
one, two, three, and four years.
r1 = 5.3% r2
= 5.9% r3 = 6.6%
r4 = 7.4%
What are the following forward rates, where f1,
k refers to a forward rate for the period beginning in one
year and extending for k years? (Do not round
intermediate calculations. Enter your answers as a percent rounded
to 2 decimal places.)
B,)
Consider the following spot interest rates for maturities...

Thank You
1) If the expected path of one-year interest rates over the next
five years is 1.5%, 2%, 2.5%, 3%, and 3.5%, then the pure
expectations theory predicts that today's interest rate on the
five-year bond is (approximately):
2.35%
2.94%
2.50%
3.25%
None of the above.
2) U.S. government notes mature in 5 years, have a par value of
$1,000, and have an annual coupon rate of 3.5% (paid on a
semi-annual basis). The current market interest rate for...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 54 minutes 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 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago