Question

**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.

Answer #1

According to Pure Expectations Theory of Interest Rates, short term interest rates are indicator of long term interest rates. However, coming to what this theory says using the details in question. According to theory, if you invest in a 6 years treasury or invest ina 4year treasury and the when it matures, invest in a 2 year treasury (so the effective length of investment is 6 years), the amount in both the scenarios would be the same.

Mathematically,

(1 + 6yr Treasury yields)^{6} = (1 + 4yr Treasury
yields)^{4 *} (1 + 2yr forward Treasury yields 4 yrs from
now)^{2}

(1 + 7.85%)^{6} = (1 + 6.15%)^{4} + (1 + 2yr
forward Treasury yields 4 yrs from now)^{2}

2yr forward Treasury yields 4 yrs from now = 7.20%

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.

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...

Interest rates on 3 year treasury securities are currently 5%,
while 5 year treasury securities yield 8%. If the pure expectations
theory is correct what does the market believe that 2 year
securities will be yielding 3 years from now? Answer to
the nearest hundredth of a percent as in xx.xx% and enter without
the percent sign.

Interest rates on 4-year Treasury securities are currently 6.4%,
while 6-year Treasury securities yield 7.4%. The data has been
collected in the Microsoft Excel Online file below. Open the
spreadsheet and perform the required analysis to answer the
question below.
Expectations Theory
4-yr.
Treasury security yield
6.40%
6-yr.
Treasury security yield
7.40%
Algebraic solution:
Total
return earned on 6-year securities
Total
return earned on 4-year securities
Yield on
2-yr. securities, 4 years from now
Geometric solution:
1 +
Total return...

PURE EXPECTATIONS THEORY The yield on 1-year Treasury securities
is 6%, 2-year securities yield 6 2%, 3-year securities yield 6 3%,
and 4-year securities yield 6 5%. There is no maturity risk
premium. Using expectations theory and geometric averages, forecast
the yields on the following securities: a. A 1-year security, 1
year from now b. A 1-year security, 2 years from now c. A 2-year
security, 1 year from now d. A 3-year security, 1 year from now

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%...

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%

Deriving Current Interest Rates. Assume that
interest rates for one-year securities are expected to be 0.08
today, 0.1 one year from now and 0.04 two years from now. Using
only the pure expectations theory, what are the current interest
rates on three-year securities.
Enter the answer as a decimal using 4 decimals (e.g.
0.1234).

Question 1.)
One-year Treasury securities yield 4.55%. The market anticipates
that 1 year from now, 1-year Treasury securities will yield 5.7%.
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.
Question 2.)
A Treasury bond that matures in 10 years has a yield of 5.25%. A
10-year corporate bond has a yield of...

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