Question

**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 work here).**

**Rate are expected to ___________ because
________________________**

**b. For the same aboveif there is a liquidity premium of
0.10% for a 5-year bond and 0.20% for a 10-year bond, under the
liquidity premium theory (adjusting for liquidity premiums
incorporated in bond rates) what is the new expected 5-year bond
rate 5 years from now? Based on your answer, what are rates
expected to do (rise/fall/stay the same)? Explain why.**

**Expected Rate with LP __________ Rates Expected to
__________________**

**(Be sure to show your work here).**

**c. Explain how interest rates are determined under the
market segmentation theory What is the flaw in this
theory?**

Answer #1

(A)

5-Year bond rate = 1.45%

10 year Bond rate = 2.13%

Let 5 Year Expected Forward rate = X

Hence (1+0.0213)^10 = (1+0.145)^5* (1+X)^5

=>X = 0.0281455791 OR 2.815%

Rates are expected to rise in 5years from now.

(B)

5-Year bond rate = 1.45%

10 year Bond rate = 2.13%

Liquidity premium on 5 yaer Bond= 0.10%

Liquidity premium on 10 year Bond= 0.20%

5 Year Expected Forward rate = X

Hence ,

(1+0.0213-0.002)^10 = (1+0.0145-0.001)^5* (1+X)^5

=>X = 0.0251331920 OR 2.51%

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).

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...

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.

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 _?

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?

5. a. Describe the relationship between the interest rates on
bonds of different maturities.
b. If we follow the Expectation Hypothesis, calculate the
interest rate on a 3-year bond if
a 1-year bond has an interest rate of 2% and is expected to
have an interest rate of 3% next year, and 5% in two years.
c. How does the Liquidity Premium Theory explain an
upward-sloping yield curve during normal economic
environment?
d. Explain the economic implications of an inverted...

A recent edition of The Wall Street Journal reported
interest rates of 2.65 percent, 3.00 percent, 3.38 percent, and
3.65 percent for three-year, four-year, five-year, and six-year
Treasury notes, respectively. According to the unbiased
expectations theory of the term structure of interest rates, what
are the expected one-year rates during years 4, 5, and 6?
(Do not round intermediate calculations. Round your answers
to 2 decimal places. (e.g., 32.16))

A recent edition of The Wall Street Journal reported interest
rates of 7.2 percent, 7.55 percent, 7.85 percent, and 7.95 percent
for three-year, four-year, five-year, and six-year Treasury notes,
respectively. According to the unbiased expectations theory, what
are the expected one-year rates for years 4, 5, and 6 (i.e., what
are 4f1, 5f1, and 6f1)? (Do not round intermediate calculations.
Round your answers to 2 decimal places. (e.g., 32.16))

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 45 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 1 hour ago

asked 2 hours ago

asked 2 hours ago