Question

- Consider the following term structure:

Term Yield

1 1.5%

2 2.3%

3 3.5%

4 3.7%

Compute the implied forward rate on a one-year security 1 year from now and 2 years from now. What is the economic interpretation of these rates according to the pure expectations theory? …according to the liquidity preference (modified expectations) theory? Suppose that you believe that the actual future one-year rates will be greater than the implied forward rates. How would you alter your desired borrowing pattern to take advantage of your forecast?

Answer #1

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

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.

The Term Structure
shows the following Spot Rates:
Maturity in years
1
2
3
4
5
spot rate in %
1.8
2.1
2.6
3.2
3.5
What is the implied 2-year forward rate two years from now? What
is the implied 3-year forward rate two years from now?

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

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...

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 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...

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...

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...

The table below shows current and expected future one-year
interest rates. Year One-Year Bond Rate 1= 3% 2= 4% 3.=5% 4.= 8% A.
Assuming that the expectations theory is the correct theory of the
term structure, calculate the current interest rate for a four-year
bond (predicted by that theory). Show your work and include a
one-sentence explanation. B. Assume now that the liquidity premium
theory is the correct theory of the term structure. If the actual
interest rate on a...

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