Question

Determinants of Interest Rates for Individual Securities The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased ten years from today, E(10r10).

Answer #1

As per Interest expectation theory, on the basis of long term interest rates, short term interest rates in futures can be predicted. | |||||||

Current rate on 10-Year Treasury bonds | 3.25% | 0.0325 | |||||

Current rate on 20-Year Treasury bonds | 5.50% | 0.055 | |||||

Maturity risk premium is zero. | |||||||

So, as per expectation theory, Expected rate (forward rate) on a 10-Year bonds purchased ten years from today can be calculated by below : | |||||||

(1 + Forward interest rate)^n = (1 + Longer time Spot rate)^n / (1+ Shorter time Spot rate)^n | |||||||

(1+F)^10 = (1 + 0.055)^20 / (1+0.0325)^10 | |||||||

(1+f)^10 = | 2.917757 | / | 1.376894 | ||||

(1+F)^10 = | 2.119086 | ||||||

1+F = | 1.07799 | ||||||

F = | 0.07799 or | 7.80% | |||||

So, Expected rate on a 10-Year Treasury bond purchased ten years from today is 7.80%. |

Determinants of Interest Rate for Individual
Securities The Wall Street Journal reports that
the rate on 3-year Treasury securities is 7.90 percent, and the
6-year Treasury rate is 8.15 percent. From discussions with your
broker, you have determined that expected inflation premium is 3.40
percent next year, 3.65 percent in Year 2, and 3.85 percent in Year
3 and beyond. Further, you expect that real interest rates will be
3.95 percent annually for the foreseeable future. What is the
maturity...

The Wall Street Journal reports that the current rate on 5-year
Treasury bonds is 2.60 percent and on 10-year Treasury bonds is
4.85 percent. Assume that the maturity risk premium is zero.
Calculate the expected rate on a 5-year Treasury bond purchased
five years from today, E(5r5). (Do not round intermediate
calculations and round your answer to 2 decimal places.)
Expected rate %

The Wall Street Journal reports that the rate on 9-year Treasury
securities is 6.85 percent and the rate on 10-year Treasury
securities is 7.15 percent. The 1-year risk-free rate expected in
nine years is, E(10r1), is 7.75 percent. According to the liquidity
premium hypotheses, what is the liquidity premium on the 10-year
Treasury security, L10? (Do not round intermediate calculations.
Round your final answer to 2 decimal places.)

The Wall Street Journal reports that the rate on three-year
Treasury securities is 2.53 percent and the rate on four-year
Treasury securities is 2.74 percent. The one-year interest rate
expected in three years, E(4r1), is 3.22 percent. According to the
liquidity premium hypotheses, what is the liquidity premium on the
four-year Treasury security, L4?

The Wall Street Journal reports that the rate on 5-year
Treasury securities is 1.80 percent and the rate on 6-year Treasury
securities is 2.35 percent. According to the unbiased expectations
theories, what does the market expect the 1-year Treasury rate to
be five years from today,
E(6r1)?
What is the treasury rate Percentage %

Determinants of Interest Rate for Individual
Securities You are considering an investment in 30-year
bonds issued by a corporation. The bonds have no special covenants.
The Wall Street Journal reports that 1-year T-bills are
currently earning 3.80 percent. Your broker has determined the
following information about economic activity and the corporation
bonds:
Real interest rate = 3.15%
Default risk premium = 3.05%
Liquidity risk premium = 1.35%
Maturity risk premium = 2.80%
What is the inflation premium? What is the...

eterminants of Interest Rate for Individual
Securities You are considering an investment in 30-year
bonds issued by a corporation. The bonds have no special covenants.
The Wall Street Journal reports that 1-year T-bills are
currently earning 3.80 percent. Your broker has determined the
following information about economic activity and the corporation
bonds:
Real interest rate = 3.40%
Default risk premium = 3.55%
Liquidity risk premium = 1.60%
Maturity risk premium = 3.30%

Suppose in the Wall Street Journal you see the following
current (spot) interest rates for Treasury bonds with an upward
sloping yield curve:
5-year
bond rate =1.45%; 10-year bond rate =
2.13%
a. Under the expectations theory, what is the expected
5-year bond rate (forward rate) 5 years from now? Based on your
answer, what are rates expected to do (rise/fall/stay the same)?
Explain why
Expected 5-year bond rate 5 years from now =
_________________
(Be sure to show your...

You read in The Wall Street Journal that 30-day T-bills
are currently yielding 4.5%. Your brother-in-law, a broker at Safe
and Sound Securities, has given you the following estimates of
current interest rate premiums:
Inflation premium = 3.00%
Liquidity premium = 0.6%
Maturity risk premium = 2.00%
Default risk premium = 2.00%
On the basis of these data, what is the real risk-free rate of
return? Round your answer to two decimal places.
The real risk-free rate is 2.25%. Inflation...

You read in The Wall Street Journal that 30-day T-bills
are currently yielding 0.5%. Your brother-in-law, a broker at Kyoto
Securities, has given you the following estimates of current
interest rate premiums on a 1 year bond:
Liquidity premium = 0.5%.
Maturity risk premium = 0.5%.
Default risk premium = 1%.
On the basis of these data, what is the short term corporate
bond rate?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 18 minutes ago

asked 19 minutes ago

asked 27 minutes ago

asked 27 minutes ago

asked 30 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 47 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago